The OPEC+ voluntary production cuts, on paper promising curtailments amounting to 1.66 million b/d, should have been the main story for May. Regrettably for many in the Middle East, just as participating countries were preparing to curb output, the overall market sentiment worsened greatly. First it was refinery margins that forewarned of difficulties ahead, then data on Chinese manufacturing depressed markets even further and protracted negotiations on the US debt ceiling put the icing on the bearish cake. As Middle Eastern producers were thinking of formula prices for their cargoes loading in June, they did not necessarily see the scope of the headwinds that they were up against. There was still no mention of ouching, of punishing market short-sellers and there was hope that the negative trends in market positioning could be turned around once the reality of OPEC+ production cuts brakes through the clouds. Things have taken an awkward turn, however, and clouds have been the mainstay for the region’s main exporters.
Chart 1. Saudi Aramco’s Official Selling Prices for Asian Cargoes (vs Oman/Dubai average). Source: Saudi Aramco.
Saudi Arabia’s national oil company Saudi Aramco has cut all its Asian formula prices for June-loading cargoes going to Asia, simultaneously ramping up the OSPs for European destinations. For Asia, the month-on-month downward revision was expected. Despite the slight increase in the Dubai cash-to-futures spread, up $0.15 per barrel compared to March, refinery margins have been in freefall throughout April and that gloom has set the sentiment for prices. Surprisingly, the biggest month-on-month drop (down $0.90 per barrel compared to May OSPs) came for Arab Heavy, a grade that saw the biggest increases in the past months, whilst Arab Light was only cut by $0.25 per barrel to a $2.55 per barrel premium vs the Oman/Dubai average. Considering the substantial pricing decrease and Saudi Arabia’s pledge to cut 500,000 b/d from its production targets, it might come as surprise that Saudi Aramco vowed to allocate full requested volumes to Asian customers. Assuming Aramco will cut output, this can only mean that demand for Saudi barrels is getting weaker amidst recessionary pressures.
Chart 2. Formula prices of US-bound cargoes by selected grades (vs ASCI).Source: Saudi Aramco
Saudi exports to the United States have halved year-on-year so far, averaging a meagre 230,000 b/d this year, according to Kpler tracking data. Not only that, the Gulf Coast is no longer the key region for whatever remaining volumes still are delivered to the US as crude-strapped refiners in PADD 5 have been ramping up their purchases recently. Saudi OSPs have been at their highest in years and remain well above any other Middle Eastern exporter for some time already. The difference between a Basrah Medium and an Arab Medium cargo into the US Gulf Coast stands at an unbelievable $8 per barrel, even though the latter’s quality is only marginally better than the former’s. Despite its pricing, Saudi Aramco profits fell 19% year-on-year to $31.9 billion, declining in unison with the average realized crude price that dropped to $81 per barrel in the January-March period.