Saudi Arabia Deepens Asia Oil Discount to Record Low

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Saudi Aramco
A flame from a Saudi Aramco oil installion known as "Pump 3" is seen in the desert near the oil-rich area of Khouris, 160 kms east of the Saudi capital Riyadh. Saudi Aramco, as the producer is known, raised the premium for Arab Light crude to the U.S. by 15 cents a barrel to 45 cents to U.S. Gulf Coast benchmarks. Photographer: Marwan Naamani/AFP/Getty Images

Saudi Arabia, the world’s largest crude exporter, cut pricing for March oil sales to Asia, a sign that the desert kingdom is continuing to fight for market share.

State-owned Saudi Arabian Oil Co. lowered its official selling price for Arab Light crude by 90 cents to $2.30 a barrel less than Middle East benchmarks, the company said in an e-mailed statement Thursday. That’s the lowest in at least the 14 years since Bloomberg began gathering data.

“This is further evidence that they are hellbent on protecting their market share in China,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $2.4 billion, said by phone Thursday. “They are trying to stay competitive in what is the biggest area of growth.”

Middle Eastern producers are increasingly competing with cargoes from Latin America, Africa and Russia for buyers in Asia. China was the world’s second-biggest crude consumer after the U.S. in 2014, according to International Energy Agency data.

Oil prices have collapsed since the Organization of Petroleum Exporting Countries decided to maintain its output target on Nov. 27, fanning speculation that Saudi Arabia and other members were determined to let North American shale drillers and other producers share the burden of reducing an oversupply.

Raised Premium

Brent crude, the benchmark for more than half of the world’s oil, rose $1.23 a barrel, or 2.2 percent, to close at $57.80 on the London-based ICE Futures Europe exchange. West Texas Intermediate, the U.S. benchmark, advanced $1.21 to settle at $51.69 a barrel on the New York Mercantile Exchange.

Saudi Aramco, as the producer is known, cut differentials on each of the four other grades it sells to Asia, its largest market, and raised them to the U.S., northwest Europe and the Mediterranean region, according to Thursday’s statement. The discount on Extra Light crude to Asia also dropped to a low of at least 14 years and Arab Medium was cut to within 10 cents of its record discount for buyers in Asia.

“Asia is still the market that they want to keep, so they are pricing to keep the crude attractive,” Olivier Jakob, managing director of Zug, Switzerland-based researcher Petromatrix GmbH, said by phone Friday. Saudi Aramco increased pricing to the Mediterranean region where “demand has been good because refining margins are good,” he said.

Refiners and traders in Asia had expected Saudi Aramco to cut Arab Light crude by $1 a barrel, according to the median estimate of eight buyers in a Bloomberg survey this week.

Persian Gulf oil producers sell most of their crude under long-term contracts to refiners. Most of the region’s state oil companies price their oil at a premium or discount, also known as the differential, to a benchmark. For Asia the benchmark is the average of Oman and Dubai oil grades.

China Market

Saudi Arabia’s share among the top three suppliers to China fell to 37 percent in December, from 44 percent in October, as the country lost ground to Angola and Russia, according to Julian Lee, an oil strategist for Bloomberg First Word. In the U.S., Saudi Aramco is in contention with Mexico to be the second-largest supplier behind Canada, Lee said.

The kingdom’s state oil producer raised the differentials on all crude it will ship to the U.S. next month by 15 cents a barrel, pushing the premium for Arab Light to 45 cents more than the U.S. Gulf Coast benchmark.

Saudi Aramco took the oil market by surprise when it trimmed its November crude pricing to five-year lows for Asia, signaling the biggest producer in OPEC would defend its market share rather than seek to prop up prices.

“The U.S. used to be the market the Saudis were most concerned about preserving market share in, but that’s no longer the case,” O’Grady said. “China is where they see growth coming from in the decades ahead and the U.S. is also producing a greater share of the oil it needs.”

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