Saudi Arabia, the world’s largest oil exporter, is expected to cut prices for most of the crude grades it sells to Asia in July, the first reduction in five months. This comes as Middle East benchmarks and margins for Asian refiners have weakened, according to refining sources.
The July official selling price (OSP) for Saudi’s flagship Arab Light crude is expected to fall by 30 to 50 cents per barrel, a Reuters survey of five refiners showed. This follows a five-month high in June.
The potential price reduction for Asia, which accounts for 82% of Saudi’s oil exports, underscores the pressure faced by OPEC producers as non-OPEC supply continues to grow while the global economy faces headwinds.
The Organization of the Petroleum Exporting Countries and their allies, known as OPEC+, are likely to extend voluntary supply cuts at their June 2 meeting. This move is aimed at supporting prices as the market grapples with ample supply and weaker demand.
The decision by state oil giant Saudi Aramco to potentially reduce its OSPs comes after the first and third-month price spread for the Middle East benchmark Dubai narrowed in backwardation by about 40 cents this month, the sources said. Backwardation is a market structure where prompt prices are higher than those in future months, indicating tight supply.
However, the sources noted that the tightness in supply caused by sharply lower exports from Mexico and Abu Dhabi has eased after state energy firms Pemex and ADNOC reduced domestic intake of their own oil. Additionally, Canada has started exporting heavy oil from its newly expanded Trans Mountain pipeline to Asia.
With supply tightness easing and weak refining margins in Asia, one of the sources said the OSPs for Arab Medium and Arab Heavy should be reduced further.