Saudi Arabia, the world’s top oil exporter, has cut its crude oil prices in the Asian market by the largest margin in two decades. Even after this steep discount, however, Saudi oil remains more expensive than that of its Middle Eastern rivals.
As a result, Asian buyers and traders have shown limited interest in purchasing Saudi crude. On Monday (June 6), state-owned Saudi Aramco cut the official selling price of its flagship “Arab Light” crude for August by $11 a barrel in one move. The new price was set at $1.50 below the average of Oman and Dubai crude prices. Prices for four other grades of Saudi crude were also cut by $11 a barrel each.
Market analysts say an interim agreement signed between the United States and Iran last month has allowed shipping traffic through the strategically vital Strait of Hormuz to begin normalizing, restoring oil loading operations. This is behind the sudden drop in global oil prices.
Earlier, in May, shipping through the Strait of Hormuz had been halted due to the war between the United States and Iran, pushing global oil prices to historic highs, since roughly one-fifth of the world’s total oil supply passes through the strait.
Meanwhile, competition in the Asian market has intensified further after the United States eased sanctions on Iran for 60 days. The National Iranian Oil Company is now trying to win back its old Asian buyers beyond China’s independent refineries. Abu Dhabi National Oil Company, Iraq’s SOMO, and Kuwait Petroleum Corporation are also offering steep discounts to attract buyers.
According to analysts at market research firm Vortexa, weak oil demand in Asia — particularly China — combined with eased sanctions on Iranian oil, has intensified competition among sellers to the point that the market has shifted entirely into buyers’ hands.
Sources at various Asian refineries and trading firms say Saudi crude loading in August will still cost several dollars more per barrel than other Gulf grades. A major reason is the high shipping costs for transporting oil from within the Persian Gulf, along with geopolitical risk. The current ceasefire agreement between the United States and Iran remains fragile, making it far more costly to charter tankers that enter the Persian Gulf. A source at an Indian refinery said they are getting oil from other companies at much lower prices, so there is no rationale for paying more for Saudi crude.
Another trader said Abu Dhabi’s Upper Zakum crude, transferred ship-to-ship at Oman’s Sohar port, is selling $6 to $8 below the Dubai rate. Meanwhile, chartering ships to load oil from Saudi Arabia’s Ras Tanura port costs more than double.
According to estimates, bringing oil out from within the Gulf costs roughly $15 more per barrel than from outside it. Market participants believe Saudi Arabia does not want to get drawn into a price war right now and is instead trying to artificially hold prices up. One oil trader remarked that the Saudis know full well their oil is now priced high, yet they are holding the price anyway.
Analysts warn that if prices are not further adjusted to match market conditions, Saudi Aramco could lose significant market share in Asia.
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