OPEC+’s landmark production cut deal along with a pickup in demand in the east of Suez may prove effective in raising the official selling prices for Middle East crude grades flowing to Asia, a survey by S&P Global Platts showed June 2.
“Clearly OSPs will get a good hike — extra cuts had the kind of significant impact on the market that the PG producers wanted,” said a Singapore-based crude trader, responding to Platts’ monthly OSP survey.
Historic OPEC+ production cuts over May and June seem to have played a considerable role in lifting market structure out of record lows it plunged to back in April, with key Middle East crude indicators in Asia clocking in significantly higher averages over May.
The Dubai cash/futures, or M1/M3 spread — a key indicator of market sentiment for Middle East crude in Asia, averaged minus $2.73/b over May for July-loading crude barrels. This is up $6.42/b month on month, Platts data showed.
Oil markets also witnessed one of the strongest recoveries in outright prices over May, with supply-side response seem to be the main factor while returning demand remains in a fragile state, said survey respondents.
The front-month cash Dubai outright price rose 68.4% from $20.70/b on April 30, to $34.85/b on May 29, Platts data showed.
Survey respondents in Asia were unanimous on the general direction for July OSPs, and expect prices issued by Saudi Arabia, UAE, Kuwait, Qatar, Iraq and Iran to be hiked in a general range between $2/b and $5/b.
“I guess they will increase, but not by as much as $6/b to $7/b [rise in Dubai spread],” said a China-based trader, one of the survey’s respondents. “Saudi Arab Light will be up by $4.5/b to $4.7/b, and Arab Medium and Heavy will be up more [than that], while Arab Super Light will be increased to a lesser degree,” she added.
Last month, producers also hiked OSPs to Asian customers, with Aramco raising price differentials for four out of its five crude grades by 90 cents/b up to $1.70/b month on month.
Middle East crude prices have also seen a marked inversion between prices for light crude grades and their heavier counterparts as demand for lighter products plummeted in recent months.
Light crude recovery
The inversion between light and heavy crude may narrow, or even reverse this month if product margins for gasoline, naphtha and middle distillates rebound to a sufficient degree, said survey respondents in Asia.
“Murban could be small premium over Dubai in line with mogas recovery,” said a third respondent.
July loading cargoes of Murban have traded in firm premiums over $1/b, touching as high as $1.50/b over the July OSP for some spot market deals, traders told Platts.
Keeping this in mind, UAE’s ADNOC is likely to raise the Murban OSP for July by at least $1/b to $1.50/b, said some respondents.
Others, however, believe ADNOC will hike the price of Murban in step with Saudi Aramco’s price hike for Arab Extra Light crude. The two are considered closely comparable grades by Asian traders.
“ADNOC, I think, will follow Saudi with $2.50/b rise,” said the first survey respondent.
In April this year, ADNOC set the price of flagship Murban crude at a discount to medium, sour Upper Zakum for the first time ever, while Aramco slashed the price of its Arab Extra Light to the same level as that of its lower value Arab Medium and Heavy crudes. The inversion between light and heavy crudes deepened when OSPs for June were issued in May.
Middle East crudes have departed from conventional price setting methodology in recent months amid a period of uncertainty and hotly contested market share by producers.
At the same time, however, all Middle East pricing to Asia is now chronologically aligned on a forward looking baseline, making it easier for buyers to compare like-for-like grades sold by different producers. This month, producers are expected to issue prices for cargoes loading from the Persian Gulf in July.
As a result, how July-loading cargoes traded in the spot market over May will provide essential cues about Asian demand-side sentiment to Middle East sellers.
Producers are also understood to closely track monthly changes in Dubai and Oman spreads to define the core direction and extent of price hikes or cuts. They may also give weightage to other considerations from time to time, such as the ongoing debate on OPEC+ production cuts.
The OPEC+ meeting may be moved forward to June 4, from the scheduled June 9-10, so July nominations can factor in any changes to oil production quotas, according to sources familiar with the discussions.
Platts surveys a range of crude oil market participants across Asia for OSP expectations each month, comprising sellers, refiners and traders of Middle East crude oil in the region.