Red Sea disruptions force Saudi Aramco to slash Oil Prices

Logistics have been pushed to the forefront of oil trade as Yemen missile and drone counter attacks continue to disrupt navigation to Israel through the Red Sea and the Suez Canal.

The list of companies avoiding the Bab el Mandeb Strait and the Red Sea keeps on expanding with each passing day, ranging from oil majors like BP or Shell and all the way to Asian refiners such as the UAE’s ADNOC or India’s Reliance.

Whilst the oil exports of Middle Eastern crude producers to Asia have not been impacted so far by any strikes, reaching the Atlantic Basin is becoming an increasingly difficult task as freight rates spiral out of control.

Faced with such an uphill battle, Saudi Arabia and Iraq responded by scaling their formula prices lower, simultaneously pressured by disappearing backwardness in key futures contracts as well as weakening European demand.

Asian refiners expected hefty cuts in Saudi Aramco’s formula prices, however the ultimate price-slashing done by the Saudi national oil company might have surprised even the most ambitious among all buyers.

The month-on-month change in the Dubai cash-to-futures spread amounted to $1.40/bbl, with the Middle Eastern futures contract ending December in con-tango, so the pricing cut was inevitable.

However, Saudi Aramco cut all its February-loading formula prices to Asia by $2 per barrel, bringing the OSP of Arab Light in the Asian continent to the lowest level since November 2021, at $1.50 per barrel above the Oman-Dubai average.

Because the price cut was uniform, the relatively narrow grade-by-grade spreads remain in place; there’s less than $2 per barrel separating Arab Light and Arab Heavy.

Despite the huge downward revision, Saudi Arabia will need more to convince Chinese buyers that its prices are competitive with market reports indicating that next month’s loading nomination have not changed much from the 1.35 million b/d seen in January.

Perhaps the ongoing talks on allowing China’s Rongsheng to purchase a 50% stake in the Sasref refinery in Saudi Arabia are one of the more creative steps to deepen the Saudi-Chinese relationship.

Saudi Aramco extended its unexpected generosity to other continents, too. For European buyers the February formula prices were slashed by a uniform $1.50/bbl compared to January, with Arab Light being the only notable exception.

Arab Light in Northwest Europe was lowered by the same $2/bbl as Asian OSPs, decreasing to a mere $0.90 per barrel premium to ICE Brent, whilst for Mediterranean refiners the same grade is looking even better at $0.40 per barrel above Brent.

Seeing that Saudi Aramco has been emptying its inventories at home and pre-moving oil into Sidi Kerir in anticipation of higher demand.

Breaking with the tradition of keeping US prices as high as possible, Saudi Aramco has also softened its pricing strategy vis-a-vis legacy buyers in the Gulf Coast, slashing formula prices by the same $2/bbl.

Arab Light remains the cheapest grade for any US buyer, assessed at a $5.15 per barrel premium to the Argus Sour crude index, indicating that Aramco would prefer to see it getting higher traction in the United States.

Overall, Saudi Aramco made a bold statement about taking pricing seriously (again), and ad hoc buyer demands for more crude next month suggest their strategy shift might be bearing fruit.

At the same time, tensions are running high around Iran after the IRGC seized a tanker that was carrying Iraqi crude to Turkey.

The St Nikolas crude tanker was renamed after a 2023 maritime incident that saw it seized by US authorities and the Iranian crude cargo aboard being removed into a storage tank farm in Houston, TX.

Tehran seized it back mid-January, despite the tanker being renamed from Suez Rajan to St Nikolas, created another potential choke-point for shipping in the Strait of Hormuz.

Oil Price.com / ABC Flash Point News 2024.