LAUNCESTON, Australia (Reuters) - Saudi Arabia is increasingly stuck between the rock of faltering crude oil demand growth and the hard place of trying to ensure supply is crimped enough to prop up prices.
The world’s biggest crude exporter has delayed releasing its monthly official selling prices (OSPs) by a week, in what may be a sign that it’s grappling with how to achieve what is most likely an unachievable goal.
Normally Saudi Aramco, the state-controlled oil giant, releases the OSPs around the 5th of each month, but prices for September loading cargoes will now only come next week, Reuters reported on Tuesday, citing a source familiar with the matter.
The market is expecting that Saudi Aramco will lower the OSPs for its customers in Asia, which buy about two-thirds of the kingdom’s output.
A survey of Asian refiners estimated that the September OSP for the flagship Arab Light crude will be cut by a median 61 cents a barrel, from the premium of $1.20 a barrel to the Oman/Dubai average for cargoes loading in August.
This forecast is justified by the weakening of refinery margins in Asia, as the recovery in crude oil prices in the wake of the production cuts by the OPEC+ group hasn’t been matched by a recovery in fuel demand and prices for refined products.
The profit margin, or crack, for making a barrel of gasoline from Brent crude at a typical Singapore refinery rose to 75 cents on Wednesday, up from a loss of 74 cents the prior day.
However, the crack remains weak, and is down from a recent peak of $4.69 a barrel on June 24.
Similarly, the profit margin for making a barrel of gasoil, the building bloc for diesel and other middle distillates, remains soft despite rising to $6.25 on Wednesday, up from the prior close of $5.56.
This is still well below the high so far this year of $16.15 a barrel on Jan. 3.
While profit margins for refined fuels in Asia have weakened in recent weeks, the price of crude oil has been recovering, with Brent futures rising 182% from the intraday low of $15.98 a barrel on April 22 to Wednesday’s close of $45.17.
OPEC+ COMPLIANCE, CHINA IMPORTS
In addition to weak profitability among its refining customers, Saudi Aramco has several other concerns.
The compliance with agreed production cuts by members of the Organization of the Petroleum Exporting Countries appears to be slipping, with a Reuters survey showing the group’s output rose by 970,000 barrels per day (bpd) in July.
Of the 10 OPEC members with output targets, overall compliance was 94% in July. The group pumped 20.94 million bpd in the month, up from June’s 19.96 million bpd.
It may also be the case that the producer countries allied with OPEC in the group known as OPEC+ may also be raising output, with Russia increasing it production by 400,000 bpd in early August.
The output cuts agreed by OPEC+ are scheduled to ease to 7.7 million bpd in August from 9.7 million bpd in the May to July period.
At the same time that OPEC+ is increasing output, Asian countries outside of China are still battling to fully restart their economies amid the ongoing novel coronavirus pandemic.
This means fuel demand is likely to remain under pressure across much of the region, and the higher oil prices won’t be helping to stimulate consumption either.
China may also present something of a concern for Saudi Arabia and other major crude exporters, as its run of record-breaking monthly imports is expected to end in August.
China’s imports in recent months were buoyed by the arrival of a flood of crude bought during the brief price war between Saudi Arabia and Russia that broke out in March but ended in early April with a renewed output cut deal.
China’s crude imports in July are expected to be around 13.39 million bpd, according to estimates by Refinitiv Oil Research, eclipsing June’s all-time high of 12.9 million bpd, which in itself was higher than the then-record 11.3 million bpd in May.
Refinitiv estimates that China’s August imports will drop to 13.05 million bpd as the last of the cheap crude arrives and port congestion is finally cleared.
From September onwards China’s imports may fall further, especially if the regional prices for refined fuels remain soft, thereby lowering the incentive for China’s refineries to export products surplus to domestic needs.
Overall, Saudi Arabia faces uncertain demand from major importers in Asia as well as rising output from the OPEC+ group, two bearish factors that may well tip the balance in favour of securing market share rather than carrying the bulk of the weight of propping up prices through supply discipline.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Richard Pullin
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