Saudi Arabia’s surprise cut to the March official selling prices (OSPs) of its heavy and medium crudes to Asia could put further pressure on Iran, which is struggling to retain its share of the regional market, industry sources said.
Some market players were expecting the kingdom to marginally raise prices of the two grades. The announcement comes after China, the top buyer of Iranian oil and also the fastest expanding major oil importer, cut its imports from Iran by nearly half for the third straight month. “I can’t imagine the Saudis did not have the Iran situation on their minds when they priced their heavy and medium barrels,” a Singapore-based trader said. “No way you can ignore the current geopolitical situation, especially with refiners in Asia already running contingencies to cut back crude imports from Iran.” The kingdom’s state oil firm informed customers that it had set the OSP for March Arab Heavy barrels to Asia at the Oman/Dubai average minus 85 cents, down 40 cents from the previous month. The Arab Medium grade was pegged at the Oman/Dubai average plus 25 cents, down 50 cents from February.
Regional refiners and traders had expected Saudi Arabia to narrow the spread between the heavy and medium and the lighter grades, due to the strength of the Asian fuel oil market.
A strong fuel oil market means refiners may have been willing to pay a higher price for crude because of the profit they would earn from processing a barrel of oil into the product, giving Saudi Arabia an opportunity to earn more from each cargo sold. “Even though the fuel oil cracks in Asia have eased the past few sessions, it is still relatively strong,” another Singapore based trader said.
Asia’s front-month March fuel oil crack was at a discount of $3.36 a barrel midday, versus year ago levels at a discount of $8.45 a barrels, Reuters data showed. The entire 12-month forward curve for the fuel oil-Dubai cracks, was $5-$6 a barrel higher than the same curve on a similar date a year ago. Tensions between Iran and the West worsened last month when Washington and the EU imposed the toughest sanctions yet on Tehran in a bid to force it to abandon its nuclear programme. The measures are aimed at blocking out the second-biggest Opec oil exporters’ sales of crude.
