Look out for Saudis' July official selling prices for key to oil outlook

Launceston, Australia

NEXT month's meeting of the Organization of the Petroleum Exporting Countries (Opec) is being touted as key to the outlook for crude oil prices, but a strong indication of what's likely will come next week.

Saudi Aramco, the state-owned producer of the world's largest crude exporter, will release its official selling prices (OSPs) for July-loading cargoes, and these in turn largely set the prices for much of the exports from the Middle East.

The problem with set-piece meetings like the Opec gathering on June 22 in Vienna is that they focus tremendously on what is said, rather than what is actually done.

The OSPs, on the other hand, show exactly what the Saudis are doing in the oil market, and in some ways are a more important signal.

The Saudis have an opportunity with the July OSPs, likely to be released next week, to show they are serious about two issues currently dominating crude oil markets.

These are concerns about the tightness of global supply, especially in light of Venezuela's woes and the possible curtailment of Iranian exports, and the rising importance of the United States as an exporter, particularly to the major consuming region of Asia.

In recent months, Saudi Aramco has been lifting its OSPs to Asia, with the price for its benchmark Arab Light grade being set for June cargoes at a premium of US$1.90 a barrel to the Oman/Dubai average, the highest since August 2014.

This increase was viewed by several refining customers as unexpectedly large, with Sinopec, Asia's largest refiner, showing its displeasure by cutting the volumes of Saudi crude it would lift in June, the second month in a row it decided against taking its normal allocation.

If Saudi Arabia is serious about raising crude output and boosting supply, one sure way of signalling this would be a sharp lowering in the OSP for July cargoes, with the cut being bigger than what would be justified by market fundamentals.

Saudi Energy Minister Khalid al-Falih and his Russian counterpart Alexander Novak met last week in St Petersburg and discussed a gradual easing of the output curbs Opec and its allies agreed to in November 2016, according to sources.

This led to crude prices stumbling, with Brent dropping 4.3 per cent from US$78.79 a barrel at the close on May 24 to US$75.39 at the finish on Tuesday.

The trick for the Saudis, the rest of Opec and their Russian allies, is to ensure that crude prices remain anchored as close to US$80 a barrel as possible, which seems to be a level that is a good compromise between meeting the fiscal needs of the producers without being high enough to prompt too much demand destruction.

The Saudis also have to balance the geopolitics of oil, striking a balance between their need for relatively high prices against the support of US President Donald Trump in their struggle against regional rival Iran.

In some ways the wild card for the oil markets currently is the United States, which is becoming an increasingly important player in Asian markets.

Record US crude shipments to Asia are expected in the coming months, with a senior executive at a US oil company estimating that the country will ship some 2.3 million barrels per day (bpd) in June, of which 1.3 million bpd will head to Asia.

Vessel-tracking and port data compiled by Thomson Reuters Oil Research and Forecasts show that about 620,000 bpd of US crude headed to Asia in the first five months of 2018, up from just 259,000 bpd in the same period last year.

However, if US crude exports to Asia do surge to more than one million bpd in coming months, this could provide the Saudis and the Russians with an added incentive to make more oil available to the market, and at a more competitive price.

Again, there is a geopolitical angle, with China, the world's biggest crude importer, under political pressure by President Trump pressure to buy more from the United States in order to lower the US trade deficit with China.

At the same time the Chinese have made their unhappiness with the recent Saudi price increases quite clear, meaning they would most likely want to see a substantial reduction before boosting their volumes from the kingdom. REUTERS