Aramco to Widen Light-Heavy Spread to Five-Month High

(Corrects units in sixth paragraph of Aug. 2 story.)

Saudi Arabia may raise the premium of its light crudes over its heavier grades for buyers in Asia to the most in five months to tap increasing profits from producing fuels such as naphtha and diesel.

Saudi Arabian Oil Co., the world’s largest crude exporter, will sell Arab Extra Light for September at $4.15 a barrel more than Arab Heavy, according to a Bloomberg News survey of 11 buyers in Asia. That’s $1.15 higher than this month and the largest increase since March. The premium is set to rise as refiners benefit from improved margins for producing naphtha while fuel oil’s value dropped, said the respondents.

“The lighter products and fuel oil spread has widened, meaning the light-heavy crude differential will widen as well,” said Osamu Fujisawa, an independent oil economist in Tokyo who worked for Saudi Arabian Oil and Royal Dutch Shell Plc (RDSA) for a combined 43 years. Extra Light yields more naphtha and less fuel oil than the heavier grade.

Saudi Aramco, as the company is known, sets its export differentials to buyers in Asia as a premium or discount to the average of benchmark Oman and Dubai oil. It typically announces prices on the fifth day of the month.

Arab Extra Light will be cut by 35 cents to a premium of $2.35 a barrel to the marker grades, while Arab Heavy will drop by $1.50 to a discount of $1.80 a barrel, according to the survey.

The profit from processing crude into naphtha rose in Asia to average $49.87 a metric ton during the last five days of July, up from $34.83 during the same period in June, according to data compiled by Bloomberg.

Product Yields

Aramco’s Extra Light yields about 25 percent naphtha when processed in a simple refinery, according to data from New York- based Energy Intelligence Group. Arab Heavy provides about 16 percent.

Fuel oil averaged $1.51 a barrel less than Dubai oil during the final week of last month, down from a 38 cent premium in June, according to PVM data.

Arab Heavy yields 53 percent heavy residue such a fuel oil during basic processing, compared to 42 percent for Arab Extra Light, according to Energy Intelligence.

Price differentials for all grades will fall because of a narrowing Dubai crude backwardation, which is when the price for prompt crude is higher than that for later deliveries. A decreasing backwardation signals weakening demand from refineries.

Dubai Backwardation

Dubai crude purchased one month in the future cost an average 65 cents a barrel more than deliveries in three months during the final week of July, compared with $1.37 during the same period in June, according to PVM data.

“The backwardation is not so strong right now, so Saudi Aramco will have to lower differentials for September,” for all grades, Fujisawa said.

Arab Light and Arab Medium differentials will both be reduced by $1 a barrel each to a premium $1.05 and a discount of 10 cents, respectively.

The following table gives the median of 11 responses to a survey of oil buyers are refineries in Japan, India, South Korea, Singapore and China. Prices for customers in Asia are set as a differential to the average of Oman and Dubai grades as assessed by Platts, the energy-information division of McGraw- Hill Cos. Prices are in U.S. dollars a barrel.

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                      Sept.      Aug.      Change (Est.)
Arab Extra Light      +2.35      +2.70     -0.35
Arab Light            +1.05      +2.05     -1.00
Arab Medium           -0.10      +0.90     -1.00
Arab Heavy            -1.80      -0.30     -1.50

Light v Heavy         +2.85      +2.35     +0.50
Ex. Light v Heavy     +4.15      +3.00     +1.15
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To contact the reporter on this story: Ramsey Al-Rikabi in Singapore at ralrikabi@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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