Column: Rising Saudi crude oil prices set to come up against recession fears: Russell

Saudi Arabia The Shaybah oil complex is seen in this aerial view deep in the Rub’ al-Khali desert, Saudi Arabia, November 14, 2007. REUTERS/Ali Jarekji (SAUDI ARABIA)

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LAUNCESTON, Australia, July 7 (Reuters) – Consider the following to show just how weird global crude oil markets are right now.

Saudi Arabia on July 5 raised the selling price of its crude oil for Asia to just below a record high, reportedly due to strong demand and high refining margins.

In the two days since the official selling price (OSP) of the world’s largest oil exporter rose, benchmark Brent futures fell 11.3%, reportedly due to weak market conditions. demand and fears of recession.

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Reconciling these two developments may seem a bit impossible, but in some ways they reflect the difference between the reality of physical oil trading and the perception of the much larger paper market.

Seen through the prism of developments in Asia’s physical markets for crude and refined products, the decision by Saudi Aramco (2222.SE), the kingdom’s state-controlled oil producer, to increase its PSOs for cargoes of August makes sense.

The OSP for Aramco’s benchmark Arabian Light Crude for Asian customers for cargoes loaded in August was increased by $2.80 per barrel from the July level to a premium of $9.30 per barrel per relative to Oman/Dubai regional ratings. Read more

It was just below the record premium of $9.35 a barrel seen in May, and shows that the Saudis are seeing solid demand for crude from customers in Asia, the top importing region, as well as margins of extremely solid refining.

To be sure, refining margins have been high, with the profit from making a barrel of gas oil, the lifeblood of diesel and kerosene, at a typical Singapore refinery hitting a record $68.69 on June 24.

It has since fallen to $41.80 a barrel at Wednesday’s close, but even that level is almost four times higher than $11.83 at the end of last year, and some 550% above the profit margin at the same period in 2021.

Saudi Aramco does not disclose its pricing formula on how it defines its OSPs, but it is generally considered a fairly technical process that takes into account the relative price between Oman/Dubai and Brent, refining margins and volumes real sought after by refining customers.

The problem for the Saudis in using a technical process is that it cannot easily adapt to the highly unusual circumstances of today’s global oil market.

NOT NORMAL

Refining margins in Asia have been largely driven by a recovery in demand as economies rebound from the COVID-19 pandemic, but also by the almost complete withdrawal in recent months of Chinese exports of refined fuels, coupled with sanctions , either self-imposed or formal. , on shipments of products from Russia.

Raising PSOs under normal circumstances would allow the Saudis to capture some of what they would most likely view as excess refining margins, and under more normal conditions refiners would have to compete more vigorously for sales on a well-stocked produce market.

But these conditions are far from normal, and it is likely that refiners will try, and perhaps succeed, to pass on the higher OSPs to retail customers.

The question then becomes how quickly, and in some Asian countries, fuel prices translate into lower demand, with fuel prices reducing their consumption in the face of escalating inflation, rising rates interest and a general loss of confidence.

If past history is any guide, this process takes several months, but it appears that the Saudi decision to increase its PSOs, while justified on a technical basis by current physical market conditions, could result in a faster and more pronounced as oil demand comes up against rising recession fears.

Certainly the paper market is beginning to price a global recession as a bigger risk than the loss of supplies from Russia following Moscow’s February 24 invasion of Ukraine and Western action. to sanction Russian energy exports.

Brent crude fell below $100 a barrel on Wednesday and maintained its weaker trajectory in early Asian trade on Thursday, dropping to $99.35, the lowest intraday price since April 11.

A lower Brent price will encourage refiners in Asia who can switch crude grades to buy more oil from suppliers at that price relative to the world market, such as West African producers Angola and Nigeria.

Asian refiners who have flexibility will first buy cheap Russian crude if they can, then they will buy grades at the price of Brent, leaving Saudi crude and Middle Eastern grades that follow Saudi OSPs as the least desirable oil.

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Editing by Kim Coghill

Our standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias by principles of trust.

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