Saudis hike May oil price for Asia; traders stumped

Singapore

ASIAN oil traders are stumped by how Saudi Arabia derived its official selling prices (OSP) for May after the world's top oil exporter unexpectedly raised the price for its flagship Arab Light crude sold to Asian refiners.

State oil giant Saudi Aramco deviated from its usual pricing formula by increasing Arab Light's official selling price for May by 10 cents per barrel to a premium of US$1.20 a barrel to the average of Oman and Dubai quotes.

Market participants were expecting a cut of between 50 and 60 US cents a barrel in a Reuters survey published earlier this week.

"This is a very unusual OSP," a trader with a North Asian firm said. "It's not in line with the past method of estimating prices."

Some predictability in how producers set their prices allow refiners to plan their purchases. Saudi Aramco typically sets the Arab Light crude price each month based on the price curve between the first-month and third-month cash Dubai prices published by S&P Global Platts.

The structure of that curve, whether it is in backwardation, when prompt prices are higher than later prices; or contango, when later prices are higher than prompt, set the direction and magnitude of the price change.

Last month, the contango between the first- and third-month prices widened by 55 US cents from February to March, leading to expectations for the price cut, even as other benchmarks - Brent and West Texas Intermediate - remained in backwardation.

A contango market suggests weaker demand for spot cargoes while backwardation is the reverse.

Saudi Aramco may have resumed its policy of not reflecting Dubai price changes based on trades on the Platts window similar to what it did in 2015 when record trading volumes pushed up prices sharply, a trader with a North Asian refiner said.

Saudi Aramco could not be immediately reached for comment.

It remains to be seen if other Middle East producers Iraq, Iran and Kuwait, who use the Saudi OSPs as a reference, will follow suit when they announce their prices next week.

The new OSPs widened the price gap between Arab Light and Arab Heavy by 30 US cents to US$3.25 a barrel, the widest since July 2016, Reuters data showed.

The spread usually widens during the summer season on stronger demand for light grades, a Singapore-based trader said. REUTERS