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Saudi Arabia Cuts Arab Light OSP, Signalling Soft Oil Demand

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Saudi Arabia Cuts Arab Light OSP, Signalling Soft Oil Demand
 
Harry Altham
Energy Analyst, EMEA & Asia

Brent is down by nearly $1/bbl this morning as Saudi Arabia cut the official selling price (OSP) to Asia by $2/bbl for February shipments, with the $1.50 premium to Oman / Dubai sinking to its lowest since July 2021. The price cut falls broadly within market expectations, as Saudi Arabia was widely expected to slash prices for the key Arab Light grade as demand for barrels weakened last month; crude oil departures to Northeast Asia fell by 8% m/m in December amid an uncertain early 2024 outlook. Despite the largest price cut in over a year, Arab Light remains expensive compared to other Middle Eastern grades, but should increase its competitiveness in East Asia, which accounts for over 80% of its export market. 

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Crude Oil Departures for Northeast Asia. Source: Refinitiv

January is typically a soft demand month (reference to 2023 should be treated with caution due to strong North American demand after storm-disrupted December 2022 demand), and the week ahead could be a choppy one as the market begins to see this year’s first critical S/D datapoints, with this week set to be the first week of normality in Europe and North America following the disruptive Christmas season. Furthermore, this week we are expecting preliminary estimates for OPEC+ production in December; a close eye will be paid to quota compliance amid a currently expected 1.3M bbd additional cut to supply for January. 

Taken alone, an Arab Light price cut is good news for Chinese refiners; teapot refiners gained access to 3.65M bbd of import quotas for 2024 (quotas of 96k bbd and 3.56M bbd reaching the annual import limit issued by the Chinese Government). Though this is a 2% drop y/y, China’s independent refiners have been given their allocations in one batch early in the year for the first time, which provides them flexibility in their strategic planning. 
disputes between iran and china over prices threaten to tighten market
However, other forces threaten to tighten supply. According to Reuters, Iran has demanded higher prices from China for its crude grades, in a move that has seen the country withhold shipments from the world’s second largest consumer. The collapsing discounts for Iranian Light are close to the $5/bbl mark (versus Dated Brent), which is significantly smaller than the $10-$15 discount seen in 2023. China is Iran’s largest export market (around 1.2M bbd in December, with teapots accounting for 90% of Iran’s total crude exports (teapot refineries originally set up to handle sanctioned oil)), and the country been buying heavily discounted Iranian, Venezuelan and Russian oil in large quantities in recent months (sanctioned oil accounts for around 30% of Chinese imports, at around 3M bbd). 
Iranian exports to China usually occur via third party countries, meaning accurate tracking is difficult, but this development is critically important for fundamental balances for oil markets as China would be forced to look for alternatives from other Arabian Gulf countries. This would consequentially increase competition among East Asian buyers (Japan, Korea) and tighten global markets. Should the stand-off deepen, the upside price risk would increase significantly as Iran lacks numerous alternative export markets (as a result of international sanctions).
Related tags: Energy

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