Saudi Arabia’s dilemma is shown quite neatly by its decision to raise crude oil prices for Asian refiners even though the kingdom is steadily surrendering market share in China, its biggest customer.
Saudi Aramco, the state-owned oil company, lifted the official selling price for its benchmark Arab Light grade to Asian refiners by 60c a barrel for July shipments, according to a statement released on Sunday.
Arab Light cargoes for July will now be sold at a discount of 25c a barrel to the Oman-Dubai crude price, up from a discount of 85c for June shipments.
The increase in the official selling price had been expected by the market, although it was by a wider margin than forecast in a Reuters survey of six Asian refiners and traders, with the increase of 60c beating even the top estimate of 50c in the poll.
Saudi Aramco sets the official selling price based on recommendations from customers and after calculating the change in the value of its oil over the past month, based on yields and product prices.
It also takes into account the market structure, and some narrowing of the Oman-Dubai contango at times in May from April was also a pointer to an increase in the price.
A contango market refers to prompt prices that are lower than those in future months, while a narrowing contango signals increased demand or tightening supply.
The difference between front-month Dubai crude and third-month stood at 54c a barrel on June 2, which is down from 62c on May 29 but is actually wider than the 44c that prevailed on the last trading day in April.
What this means is that part of the Saudi price hike for July was attributable to technical factors and was an expected response.
But it is worth noting that the change in the contango is actually very small, and certainly not enough to justify a larger-than-expected increase in the official selling price for July.
A further sign that the hike for July was higher than expected is shown by the relative lack of movement in the premium of Brent crude to Dubai, known as the exchange for swaps.
Over time the Saudi official selling price tends to track the premium quite closely, but in recent months the Saudis have kept the official selling price in a fairly narrow range while the Brent-Dubai spread has narrowed considerably, from $2.07 a barrel in December to just 65c by June 2.
Normally this would result in the Saudis lowering the official selling prices, and while they did do this for May and June cargoes, the increase for July reverses the earlier price cuts.
It does seem that the Saudis are using pricing to try to tighten supply to Asia, which buys about two-thirds of the kingdom’s exports.
This would fit with the kingdom’s stated aim of boosting prices by cutting output, along with other members of the Organisation of the Petroleum Countries (Opec) and allied producers such as Russia.
The Saudis are leading the efforts to lower output by a combined 1.8-million barrels a day, a move that aims to drain inventories by enough to lift prices over the longer run.
China shows the dilemma
But while it’s relatively easy for the Saudis to increase their official selling price by more than their customers expected, it’s less easy to fight off competitors from outside the agreement to restrict production.
China, the world’s biggest crude importer, is a case in point.
Saudi Arabia supplied 3.956-million tonnes of crude to China in April, according to customs figures released on May 23, taking their year-to-date total to 18.314-million.
This gave the Saudis a share of Chinese imports of 11.5% in April, lower than their January-April share of 13.2%.
What is probably more worrying for the Saudis is that their market share in China is heading in the wrong direction, given it was 13.4% for the whole of 2016.
In contrast, the share of Chinese imports enjoyed by Brazil, a producer outside the Opec and allies agreement, is rising.
Brazil’s share in the first four months of the year was 5.4%, up from 5% for the whole of the 2016.
And in a further sign that the Chinese are broadening their base of crude suppliers, the US gained a 0.9% share of imports in the first four months of 2017, up from a negligible 0.13% in 2016.
While it is true that suppliers such as Brazil and the US are minnows compared with Saudi Arabia and Russia, when it comes to meeting China’s oil needs, the point is that they seem able to take up the slack of any lower shipments from producers that may be restricting output.
And it is not only volumes that make disturbing reading for the Saudis and their allies, it is pricing as well.
Chinese data shows that the average price paid per tonne of crude oil in April was $379.81, or about $52.03 a barrel.
The average price of Saudi imports was higher, at $388.52 a tonne, as was those from fellow output cutters Russia, at $390.09.
In contrast, supplies from Brazil were below the Chinese average at $363.25 a tonne, as were those from the US at $368.20.
Of course, this is a bit of an apples and pears comparison, given that the Chinese customs data on imports is not broken down by grade, with lighter crudes tending to fetch a premium over heavier types.
But there has also been movement in the relative pricing since December, the month before the output cuts agreements took effect.
In December the average price of Saudi crude was 2.4% below the overall average paid by China, by April it was at a premium of 2.3%. Brazil’s crude was at a discount of 2.3% to the Chinese average in December, and this had widened to 4.4% by April.
In other words, not only is Saudi Arabia losing market share in China, its crude is now more expensive relative to those from some competitors outside the Opec and allies agreement.
The Chinese numbers neatly encapsulate the Saudi dilemma: much can they tighten supplies and raise prices before the effect on their market share becomes too pronounced?