Saudi Arabia, the world’s largest oil exporter, is anticipated to lower the prices for most of its crude oil grades sold to Asian markets in October 2024, following a significant decline in the Middle East’s benchmark Dubai crude prices last month. It was revealed on September 2024, signaling a potential shift in the oil market dynamics that could have widespread implications.
According to a survey conducted by Reuters, the official selling price (OSP) for Saudi Arabia’s flagship Arab Light crude is expected to decrease by 50 to 70 cents per barrel. This adjustment reflects a corresponding drop in Dubai price spreads observed in August. Three out of five refining sources consulted in the survey predicted that the Arab Light crude, a key Saudi export, would see its October price fall by this margin. This reduction, if implemented, would position the price of Arab Light at $2.00 per barrel above the average price of Oman/Dubai crude for Asian refiners, marking a notable shift from September prices.
The expected price cut is attributed to several factors, with weak refining margins being a primary concern, especially in China. China’s manufacturing and property sectors have been underperforming, leading to a reduction in fuel demand. One industry source highlighted the challenging market conditions, stating, margins are currently poor across the board, with the situation being even more challenging in China. The source also pointed out that September, typically the peak month for oil demand, might not live up to expectations this year, further dampening market sentiment.
Compounding the situation, the supply of oil from OPEC+ members is set to increase in October. Eight members of the organization are scheduled to boost their output by 180,000 barrels per day (bpd) as part of a broader strategy to gradually reverse their recent output cuts of 2.2 million bpd. These cuts were initially implemented to stabilize the market but will be partially lifted while other reductions remain in place until the end of 2025.
Despite these bearish indicators, not all market participants expect a significant change in the October OSP for Arab Light. Two respondents from the Reuters survey believe that the price may remain relatively stable. One of these respondents noted that the Dubai benchmark had strengthened in the last week of trading in the previous month, which could provide some support for maintaining the current pricing levels.
The outlook for Saudi Arabia’s heavier crude grades, such as Arab Medium and Arab Heavy, is slightly different. Three of the five respondents expect these grades’ prices to be reduced by less than 50 cents per barrel, driven by steady demand for fuel oil. Meanwhile, the remaining two respondents anticipate price cuts ranging from 60 to 80 cents per barrel.
Saudi Arabia’s OSPs are closely watched by the global oil market, as they set the tone for other major oil producers in the region, including Iran, Kuwait, and Iraq. The prices established by Saudi Aramco, the state oil giant, influence approximately 9 million barrels per day (bpd) of crude oil destined for Asia. These prices are typically announced around the fifth of each month and are based on a combination of customer feedback and detailed calculations of changes in the value of Saudi oil over the past month, taking into account product yields and market conditions.
However, it is important to note that Saudi Aramco officials consistently refrain from commenting on the kingdom’s monthly OSPs, maintaining a policy of silence on these matters.
As the October OSP announcement approaches, market participants are keenly observing the factors at play, including the ongoing fluctuations in the Dubai benchmark, the performance of the Chinese economy, and the impending increase in OPEC+ supply. The decisions made by Saudi Arabia will not only affect its own revenues but also have far-reaching consequences for the global oil market, particularly in Asia, where demand dynamics are becoming increasingly complex.
The potential price adjustments come at a time when the global oil market is facing multiple challenges. The slowdown in China’s economic growth has led to concerns about a sustained decrease in demand from one of the world’s largest consumers of crude oil. The broader geopolitical landscape, including tensions in the Middle East and uncertainty surrounding global economic recovery, continues to exert pressure on oil prices.
For Saudi Arabia, the anticipated price cuts are part of a broader strategy to remain competitive in the Asian market, where the majority of its crude oil exports are directed. The kingdom has traditionally used its OSPs as a tool to balance market share and profitability, adjusting prices in response to changing market conditions. The upcoming price adjustments are likely to reflect Saudi Arabia’s assessment of the current market environment and its strategic priorities.
The global oil market is expected to remain volatile, with several key factors influencing price trends. The performance of the Chinese economy will be a critical determinant of demand in Asia, while the actions of OPEC+ and other major oil producers will shape the supply side of the equation. The impact of ongoing geopolitical tensions and the potential for new developments in the global energy landscape will continue to be closely monitored by market participants.
Saudi Arabia’s expected price cuts for its crude oil exports to Asia in October 2024 underscore the challenges facing the global oil market. As the kingdom courses a complex and evolving market environment, its pricing decisions will be closely watched by industry stakeholders and will likely have significant implications for the broader oil market. With weak refining margins in key markets like China and an anticipated increase in OPEC+ supply, the stage is set for a potentially volatile period in the oil market, where pricing strategies will play a crucial role in determining the balance of supply and demand.
– Syed Raiyan Amir is a Senior Research Associate at the KRF Center for Bangladesh and Global Affairs (CBGA).