Saudi Arabia has drastically cut the official selling price (OSP) of its flagship Arab Light crude grade to Asia by $5.50 per barrel for February deliveries. This is the steepest price reduction by the kingdom since 2021 and reflects growing concerns over faltering oil demand in major Asian economies like China and India.
Key Details
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The February OSP for Arab Light to Asia has been set at $1.50 per barrel above the Oman/Dubai average, down from $6 per barrel over the benchmark in January. This is the lowest premium for Saudi crudes to Asia since March 2021 [1].
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Saudi Aramco has made even deeper cuts to prices for lighter crude grades favored by refiners in South Korea, Japan and India. The raw differential for Arab Extra Light crude plunged from plus $9.80 to plus $3.50 for next month [2].
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Significant reductions have also been introduced for other regions. Saudi crude OSPs to Northwestern Europe and the Mediterranean have been cut by $4.50 per barrel, while prices to the United States were trimmed by $5 per barrel [3].
| Crude Grade | Change in OSP for February ($ per barrel) |
|---|---|
| Arab Light to Asia | – $5.50 |
| Arab Extra Light to Asia | – $6.30 |
| Arab Light to Europe | – $4.50 |
| Arab Light to United States | – $5 |
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These pricing adjustments point to a “significantly weaker outlook for oil demand,” according to Vandana Hari, founder of Vanda Insights [4]. It also indicates Saudi Arabia’s willingness to defend market share in Asia.
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In December, Saudi production edged up by 20,000 barrels per day. Some analysts believe the kingdom may lift output further in February if customers request additional volumes following the price cuts [5].
Background
Saudi Arabia’s decision comes amid gathering headwinds for oil demand as major economies grapple with higher interest rates and stalling growth. Factory activity has contracted across the United States, Europe and Asia over the past couple of months. This is dampening fuel consumption and slowing purchases of crude for refining into gasoline, diesel and other products.
Chinese oil demand took a notable hit last month as surging COVID-19 cases prompted lockdowns and mobility restrictions. Though Beijing has started unwinding its zero-COVID policy, economists believe a strong rebound in the first quarter is unlikely [6].
Meanwhile, oil supplies are on the rise with U.S. production rebounding strongly to about 12 million barrels per day and Russian output holding up better than expected [7]. The latest OPEC+ meeting decided to stick to the grouping’s schedule of marginal monthly production increases. Investors are also monitoring negotiations around restoring the Iran nuclear deal, which could pave the way for around 1 million bpd of previously sanctioned Iranian crude returning to the market [8].
This confluence of bearish factors has put pressure on crude benchmarks, with international marker Brent sliding to around $77.50 last week before stabilizing near $80 currently. U.S. crude futures have also pulled back by over 10% since the start of December. Saudi Arabia relies heavily on oil income and aims to calibrate crude prices at levels that allow for healthy state finances without triggering large scale substitution away from petroleum or demand destruction in key markets.
Reasons and Implications
The OPEC heavyweight is essentially throwing its weight behind the physical crude market in Asia at a time when supplies appear ample and uncertainty prevails around near-term consumption trends. Energy market analyst Edward Moya described the move as a “warning shot to other OPEC+ members that they will defend market share” [9].
Refining margins for gasoline, diesel and other oil products have weakened considerably since the third quarter of last year. Complex refineries in Asia that mostly process medium and heavy sour crudes will welcome cheaper supplies from the Middle East. “The Saudis appear to be supporting buyers of Arab Light ahead of plant maintenance periods across Asia,” said Virendra Chauhan of Energy Aspects [10].
At $1.50 over Oman/Dubai crudes in February, Arab Light is also priced very competitively against Russian Urals and ESPO grades. This could help Saudi Arabia add market share in China as Urals is heavily discounted following the imposition of European sanctions and restrictions.
Some market watchers believe the extent of the Saudi price cuts signify that oil demand in China has deteriorated faster than anticipated following the sudden pivot away from zero-COVID rules in December [11]. Cases are expected to crest in the coming weeks, which should allow activity and mobility to pick up. Nonetheless, some analysts have reduced forecasts of first quarter Chinese oil demand by up to 1 million bpd.
If the demand outlook stabilizes by March, Saudi Arabia can reverse some of these pricing concessions. The monthly adjustment of OSPs based on market feedback “suggests Saudi volumes should rebound at some point in the second quarter,” Morgan Stanley wrote in a research note. The Wall Street bank still expects Brent to average $90 a barrel in 2023 [12].
The potential to quickly scale-up output also gives Saudi Arabia flexibility. If crude prices rise again on stronger demand or supply tensions in the Middle East, Riyadh may look to monetize its spare capacity instead of playing the role of market stabilizer through price cuts. Tensions persist around Iran’s nuclear program while the Russia-Ukraine war continues disrupting energy trade flows [13]. This could provide some upside risk for oil prices as 2023 progresses.
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