Aramco's price hikes disappoint amid struggling demand for Middle East crude in Asia.

http://www.petrotahlil.com/en/tiny/news-44408

HIGHLIGHTS

Aramco OSP hike "surprising", "unexpected": traders

Asia crude demand struggling to recover from COVID-19

Light/Medium quality inversion expected: traders

Petrotahlil — The unexpected price hikes from top Middle East oil producer Saudi Aramco raised a few proverbial eyebrows across the Asian crude market on Friday, with the move seen as detrimental to refiners still grappling with bleak product margins and scrambling for a foothold amid the collapsing oil demand in the region.

"I bet everyone is surprised," a crude trader said, adding that "no one expected them to increase" OSPs.

The hikes were "unexpected, as all Asia lifters were expecting a $2-$3 drop, and it seems there isn't much spot demand except in China," a China-based end-user said on Friday.

On Thursday, Saudi Aramco set the OSP differential for its Arab Light crude headed to Asia at minus $5.90/b against the average of Dubai and Oman crude assessments over June, which translates to a $1.40/b hike, a stark comparison to traders' expectations of a $1-$3/b reduction, a Platts survey showed.

Aramco set the OSP differentials for its Medium and Heavy crudes headed to Asia in June at the same level of minus $5.70/b, a month-on-month rise of $1.70/b.

Market participants noted that the OSP hikes could have been a measure to help producers shore up fast-disappearing oil revenues. However, refineries in Asia were also struggling to run at full capacity with negative product margins amid disappearing demand, they added.

"Crude prices went up so rapidly, while product cracks were still weak, hence refinery margin is again squeezed," added a Japan-based market source.

"With high prices such as these, refineries don't have much incentive to increase runs," he added.

Plummeting demand for Middle East crude grades in Asia has seen market values, including OSPs, reference spreads and spot market differentials slide into hefty discounts since March.

However, market indicators that slid sharply over April have eased in recent days, although the market structure for Middle East crude remains firmly in contango.

The Dubai cash-futures spread, a key reference for Middle East spot market sentiment in Asia, fell by more than $6/b from March to average minus $9.15/b over April.

Since the start of a new cycle from May, however, the spread has been lifted from two-decade lows to average minus at $4.66/b so far this month.

"If you look at MOC [Dubai] value and M1-M3 [cash/futures spread], and then look at the Saudi OSP for Arab Medium at minus $5.70/b for June, it still looks very attractive," a Singapore-based crude trader said.

LIGHT/HEAVY QUALITY INVERSION

Platts OSP survey respondents did accurately pinpoint a deeper quality inversion between the light and heavy ends of the crude barrel in the coming months, which was proven true with the latest set of Saudi OSPs.

While in May, Aramco set the OSP differentials for its Arab Extra Light, Medium and Heavy crudes headed to Asia at the same level of minus $7.40/b, the June set of OSPs saw the Arab Light differential slide 20 cents/b further under the prices of Arab Medium and Heavy to Asia, respectively.

The spread for Arab Extra Light saw an even deeper inversion, falling 80 cents/b under the minus $5.70/b OSPs for Medium and Heavy. The Arab Extra Light OSP for June was set at minus $6.50/b to Asia, while Arab Light was set at minus $5.90/b against Dubai/Oman, according to Aramco's OSP notice on Thursday.

The quality inversion is likely to be repeated across a slew of other Middle East crude OSPs, when producers such as Qatar and the UAE issue their respective notices in the coming days, traders said.

"Just look at the [product] cracks," the Singapore-based trader said. "Value is not at the light end of the barrel."

END