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Saudi Aramco is likely to cut its September official selling
price (OSP) to refiners in Asia, a first since May, as output hikes
by the OPEC+ group and fresh outbreaks of demand-sapping
coronavirus disease 2019 (COVID-19) weigh on prices, pushing some
crude oil markets back into contango.
The world's largest crude oil exporter could, based on
full-month average forward Dubai prices, reduce its OSP by as
little as $0.20-$0.30/bbl for its largest Arab Light grade to term
buyers in Asia, but in the last week the marker price fell by as
much as $0.80-$0.90/bbl, which is pointing to much weaker
fundamentals going forward, trading sources said.
"Things are looking bearish, I think Aramco will veer towards
the top end of this range and reduce its OSP by $0.50-$0.60/bbl.
This way the other Middle East producers will be able to sell their
spot barrels and there won't be much incentive to cheat on their
output cuts," said one trading source.
The Saudi Aramco OSP, the first to be announced among Middle
East producers, sets the trend for the others including Iraq,
Kuwait, Iran and the UAE to follow. In the past few trading
sessions spot barrels from the Gulf including Upper Zakum and
Basrah Light were hard pressed to find outlets, leading to cuts to
differentials, they said.
As a result many expect Aramco to take into consideration the
weaker price signals emanating from crude trading in the region in
the last week of July as well as the broader market with ICE Brent
now in contango.
Last month, the producer raised its August OSP to Asia by a
uniform $1.00/bbl across the grades from July, keeping the quality
spreads unchanged, according to a price list.
Global crude oil supply will increase from August after the
OPEC+ group agreed to loosen curbs by cutting output by a smaller
7.7 million b/d compared with the deeper 9.7 million b/d level that
was extended from June to July.
However, this bigger output comes at a precarious time when the
rebound in world oil demand is under threat as many nations face a
resurgence of COVID-19 including in Australia, Vietnam, the
Philippines and Japan.
Others such as India, South Africa, Brazil and the U.S. are
grappling with a continued surge in cases while in Europe, a key
demand center for Asian jet fuel and diesel, worries of fresh
outbreaks are surfacing in the UK and Spain.
The unpredictability and swift spread of COVID-19 has made the
demand outlook extremely murky, they said. However, in some major
consuming nations such as India and Japan, refiners are already
either cutting runs or holding pat on signs that the demand
recovery has lost its momentum.
Indian Oil Corp., the nation's largest refiner, will scale back
operations to 75% of capacity from as high as 93% in early July,
according to local media reports citing its chairman S.M. Vaidya.
The lower run ties in with the closing of its 300,000 b/d Paradip
refinery for a three-week maintenance from July 25.
Reliance Industries, India's second-largest refiner, brought
forward the maintenance of a 380,000 b/d crude unit at its
export-oriented 705,200 b/d refinery in the face of declining
overseas demand for distillates, trading sources said earlier.
In Japan, crude runs against the country's nameplate 3.52
million b/d capacity are holding at around the 60% mark over the
past few weeks, according to Petroleum Association of Japan (PAJ)
data even as the state of emergency was lifted amid fresh COVID-19
outbreaks.
"India are cutting runs and the recovery in Japan is not
significant, there won't be a big increase in August. Crude
purchases will be slow," the trading source said.
Even purchases from the world's largest importer, China, has
slowed down, trading sources said, as the nation works to clear
hefty crude oil purchases made in the spring that are still
clogging its ports, terminals, pipelines and storage tanks. Tankers
are even now waiting as many as 10-odd days to discharge their
cargo.
China took in a massive 53.18 million mt, or about 12.9 million
b/d, in June, easily bypassing the previous record 11.3 million b/d
that landed in May, according to preliminary data from the General
Administration of Customs (GAC).
July and August deliveries may also end up as new all-time highs
as these long-haul cargoes slowly make their way into the Chinese
refining system.
Consequently, even grades that typically get good support from
Asian refineries, i.e. Middle East medium-sour blends such as
Basrah Light and Upper Zakum are struggling even with the reduction
in competing July availability of Russian Urals. However, the
dynamics will change for August as loading programs show an
increase in Urals shipments, traders said.
This, they said, is another reason why many expect Aramco to
lean towards a bigger rather than a smaller cut to their September
OSP.
Copyright, Oil Price Information Service
Posted 07 August 2020 by Raj Rajendran, Principal Journalist, OPIS, IHS Markit
