--Clyde Russell is a Reuters market analyst. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Dec 4 (Reuters) - Saudi Aramco's decision to raise its official selling price (OSP) for January crude cargoes to Asia to the highest premium in two years looks slightly at odds with recent market developments.
The OSP for the benchmark Arab Light grade was raised to a premium of $3.75 a barrel to the Oman/Dubai average for January loadings, up from a differential of $3.45 for December and the highest since $4.15 in January 2012.
The increase of 30 cents a barrel for January premiums from December was bigger than the 20 cents forecast in a Reuters survey ahead of the Dec. 3 announcement.
The backwardation of prompt intermonth spreads for Dubai crude and a recovery in Asian refining margins were cited as reasons Aramco would raise the OSPs.
To this could be added seasonal demand increases as refiners ramp up for winter, the return of refineries from maintenance and the start-up of new units in China.
China's crude imports in December are likely in a range of 23 million to 24 million tonnes and January's should be higher, according to estimates by Thomson Reuters Oil Analytics.
For Asia as a whole, oil imports are expected to rise 7 percent month-on-month in December to around 75 million to 80 million tonnes, the oil analytics team said.
But the question is whether this strength in demand is sufficient to justify the Saudi OSP rising to a two-year high?
The extent of the backwardation in Oman oil futures is usually a good indicator of the strength of Asian crude demand.
The Oman strip <0#OQ:> has recently witnessed an easing of the backwardation, with the gap between the front-month contract and the six-month at $1.30 a barrel on Dec. 3.
This is down from $3.56 a barrel a month ago and $4.96 a barrel three months ago.
The narrowing implies demand for prompt cargoes is becoming less acute, something that would normally imply a need to lower the Saudi OSPs.
Saudi prices also have a fair correlation with the Brent-Dubai exchange for swaps DUB-EFS-1M as the Saudis wish to charge about the same for oil to customers in different parts of the world to minimise the arbitrage of cargoes between regions.
The Saudi OSP to Asia has been on a rising trend since August, which wasn't surprising at first as Brent's premium to Dubai had started trending upwards from April.
The Saudis had been increasing the OSP, which is linked to the Oman/Dubai price, to compensate for the relative weakening of Dubai against Brent.
However, when the Brent-Dubai spread changed direction after reaching a peak of $7.10 a barrel on Sept. 9, the Saudis kept raising the OSP for Asia.
The latest rise in the Saudi OSP has narrowed its gap to Brent-Dubai to just 65 cents a barrel, using the Dec. 3 Brent-Dubai spread and the Saudi January OSP.
This is down from a difference of $4.20 a barrel reached when the Brent-Dubai premium hit its September peak.
Refining margins in Asia have been recovering as well, but the Saudi price increase risks sending them lower once more.
It's not as if Asian refiners are making huge margins either, with a Singapore plant now getting a margin of $4.38 a barrel over Dubai crude for its output, according to Reuters data.
While this is an improvement from the $3.91 a barrel for November and the $3.57 for October, it's still below the moving 12-month average of $6.18.
It's unlikely that Asian refiners will think the increase in Saudi OSPs is reasonable, and this will encourage them to look elsewhere if they need spot cargoes.
Certainly both Iraq and Iran will be looking to sell more oil, with Iraq poised to become the second-largest supplier to China in 2014.
Iraq has committed to supply 882,000 barrels per day (bpd) to China next year, up 68 percent from this year, with the volume gains driven by Iraqi willingness to sell their oil at discounts to Saudi cargoes.
Iran will also be hoping that the recent easing in tensions with the West over its disputed nuclear programme will result in the Islamic republic shipping more crude, although its agreement still limits it to exporting no more than 1 million bpd.
Kuwait and the United Arab Emirates are also believed to be chasing additional volumes, unwilling to cede market share to Iraq and Iran.
None of these developments suggest the Saudis will be able to maintain high OSPs for long and that the rise for January may be followed by several months of lower prices. (Editing by Tom Hogue)