April 6, 2018 / 6:31 AM / 6 months ago

Saudi's May crude oil price hike for Asia confounds traders

SINGAPORE (Reuters) - Asian oil traders are stumped by how Saudi Arabia derived its official selling prices (OSP) for May after the world’s top oil exporter unexpectedly raised the price for its flagship Arab Light crude sold to Asian refiners.

FILE PHOTO: A view shows Saudi Aramco's Abqaiq oil facility in eastern Saudi Arabia in this undated handout photo. Saudi Aramco/Handout/File Photo via REUTERS

State oil giant Saudi Aramco deviated from its usual pricing formula by increasing Arab Light’s official selling price for May by 10 cents per barrel to a premium of $1.20 a barrel to the average of Oman and Dubai quotes.

Market participants were expecting a cut of between 50 cents to 60 cents a barrel in a Reuters survey published earlier this week.

“This is a very unusual OSP,” a trader with a North Asian firm said. “It’s not in line with the past method of estimating prices.”

Some predictability in how producers set their prices allow refiners to plan their purchases.

Saudi Aramco typically sets the Arab Light crude price each month based on the price curve between the first-month and third-month cash Dubai prices published by S&P Global Platts. The structure of that curve, whether it is in backwardation, when prompt prices are higher than later prices, or contango, when later prices are higher than prompt, set the direction and magnitude of the price change.

Last month, the contango between the first- and third-month prices widened by 55 cents from February to March, leading to the expectations for the price cut, even as other benchmarks Brent and West Texas Intermediate remained in backwardation.

A contango market suggests weaker demand for spot cargoes while backwardation is the reverse.

Saudi Aramco may have resumed its policy of not reflecting Dubai price changes based on trades on the Platts window similar to what it did in 2015 when record trading volumes pushed up prices sharply, a trader with a North Asian refiner said.

Saudi Aramco could not be immediately reached for comment.

The sources declined to be named as they were not authorized to speak to the media.

It remains to be seen if other Middle East producers Iraq, Iran and Kuwait, who use the Saudi OSPs as a reference, will follow suit when they announce their prices next week.

The new OSP’s widened the price gap between Arab Light and Arab Heavy by 30 cents to $3.25 a barrel, the widest since July 2016, Reuters data showed.

The spread usually widens during the summer season on stronger demand for light grades, a Singapore-based trader said.

“It’s certainly taken the market by surprise given the way the Dubai and product curves have traded of late, but we think the raise has to do with ongoing strength in light crudes and condensates which has spilled over into the naphtha markets,” Energy Aspects analyst Virendra Chauhan said.

Reporting by Florence Tan; Editing by Christian Schmollinger

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