Column: Saudi Arabia cuts January crude oil price, but by enough?

General view of Saudi Aramco's Ras Tanura oil refinery and oil terminal in Saudi Arabia May 21, 2018. REUTERS/Ahmed Jadallah//File Photo

LAUNCESTON, Australia, Dec 6 (Reuters) - Saudi Aramco cut its key oil prices for Asia for January, as had been expected, but the key question is whether the drop is big enough to tempt refiners to buy more crude.

Aramco (2222.SE), the world's largest crude exporter, trimmed the official selling price (OSP) for its flagship Arab Light grade to a premium of $3.25 a barrel over the regional benchmark Oman/Dubai quotes for January-loading cargoes.

This was down $2.20 a barrel from the $5.45 premium for cargoes being shipped in December and takes the OSP to its lowest premium since March.

However, the premiums are still high by historical standards, meaning that Saudi crude being supplied to Asia, which takes about two-thirds of the kingdom's total exports, is likely to be more expensive relative to competitors from Russia, West Africa, the Americas and some other Middle Eastern producers.

Saudi crude is mainly sold under long-term contracts, but these usually contain clauses that allow for variations in volumes delivered, either at Aramco's behest or the request of the clients.

This means that when Aramco's main customers in Asia, of which China is the biggest, deem Saudi crude too pricey relative to competitors, they can ask for lower volumes, or if they need more crude, they can take contracted volumes and then buy additional cargoes from other suppliers.

This dynamic can be seen in China this year, with the world's biggest crude importer dropping imports from Saudi in November, but boosting those from Russia and Angola.

China imported 1.72 million barrels per day (bpd) from Saudi Arabia in November, down from 1.87 million bpd in October, according to data compiled by Refinitiv Oil Research.

However, China's imports from Russia rose to 1.90 million bpd in November from October's 1.82 million bpd, while those from Angola jumped to 680,000 bpd from 480,000 bpd the prior month.

The boost in imports from Russia is likely because Moscow is selling crude at a discount to keep buyers or find new ones, as Western countries impose sanctions as part of efforts to punish it for its Feb. 24 invasion of Ukraine.

It's also likely that Angolan crude was cheaper than Saudi for November arrivals, as traders had reported that the West African producer had plenty of available cargoes for sale.

The question for Asian refiners is whether the decline in the Saudi OSP for January-loading cargoes is enough for them to seek full contracted volumes, or even additional volumes.

RUSSIA, CHINA UNCERTAINTY

The answer is clouded by the Russia situation, with two measures applying to Russian crude - a price cap by Group of Seven nations and a ban on imports by the European Union - both coming into effect on Monday.

While traders expect Russia will be able to successfully navigate both obstacles, it's almost certain to come at a cost.

Russian crude will have to be offered at a discount, possible to the point where the $60 a barrel price cap becomes irrelevant.

The real challenge will be obtaining sufficient tanker capacity and ensuring that cargoes can be financed and insured.

While these difficulties are likely to be resolved over time, the uncertainty of working out the process may mean Asian refiners prefer the certainty of Saudi cargoes, even if the price is less attractive.

But refiners must also anticipate demand for products, and the outlook is uncertain as well.

Slowing global economic growth amid high inflation and tighter monetary policy may weigh on fuel demand in coming months, especially after the winter heating peak passes.

China is also a bit of a wild card currently, with hopes that looser COVID-19 restrictions and Beijing's efforts to stimulate a sluggish economy will boost fuel demand in the new year.

But equally, there is concern that rising COVID-19 cases may spook the authorities and lead to a return to strict containment measures, which raises the possibility of more social unrest.

Writing by Clyde Russell; Editing by Bradley Perrett

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Clyde Russell is Asia Commodities and Energy Columnist at Reuters. He has been a journalist and editor for 33 years covering everything from wars in Africa to the resources boom and its current struggles. Born in Glasgow, he has lived in Johannesburg, Sydney, Singapore and now splits his time between Tasmania and Asia. He writes about trends in commodity and energy markets, with a particular focus on China. Before becoming a financial journalist in 1996, Clyde covered civil wars in Angola, Mozambique and other African hotspots for Agence-France Presse.