COLUMN-Saudi oil price hike to Asia shows relative strength: Clyde Russell

Clyde Russell
Reuters Middle East

--Clyde Russell is a Reuters market analyst. The views

expressed are his own.--

LAUNCESTON, Australia, Dec 6 (Reuters) - Saudi Arabia is

asking refiners in Asia to pay more for their January-loading

crude, both in absolute terms and also relative to their

counterparts in Northwest Europe.

While this may seem unfair to Asian processors, the increase

in official selling prices (OSP) by Saudi Aramco is also a sign

of the relative health of the region compared to Europe.

But the Saudis are now risking shrinking refinery profits in

Asia by too much, as happened earlier this year, increasing the

likelihood that the OSP premium will be lowered early in 2013.

The state-owned company that is the world's biggest crude

exporter raised the OSP for January for its benchmark Arab Light

grade to Asia by 35 cents a barrel to a premium of $3.30 over


This was the fifth consecutive increase in the OSP to Asia,

and reflects the strength in the region's refining margins and

the relatively strong backwardation in Dubai crude.

It's also the highest premium to Oman/Dubai since the $4.15

a barrel in January, a level at which Asian refiners expressed

discomfort and one that was subsequently wound back rapidly,

with the premium dropping to $1.15 a barrel by June.

In contrast to Asia's higher oil costs, the discount to

refiners in Northwest Europe was widened to $1.20 a barrel from

December's 20 cents over the Brent Weighted Average.

It's generally accepted that Saudi Aramco adjusts its OSPs

to reflect moves in the underlying crude in order to maintain

relative price stability for customers both in Europe and Asia.

However, it also appears that the company can adjust its

OSPs when it wants to signal that it's keeping the market


This appears to have been the case in the second quarter of

this year when the premiums to Asia narrowed and the discounts

to Europe expanded, just as the market fretted over the

potential impact of the loss of Iranian cargoes because of

Western sanctions.

The January pricing may show that the Saudis are slightly

more concerned about weak demand in Europe than in Asia.

Using the Brent Weighted Average price from Nov.

30 of $110.74 a barrel, around when the OSPs would have been

calculated, and subtracting the $1.20 discount gives a price for

Northwest European refiners of $109.64 a barrel.

Taking the Dubai swaps price at the same day of

$107.02 and adding in the January premium of $3.30 a barrel to

Asia, gives a price of $110.32.

This means in relative terms, Asian refiners are paying

around 70 cents more a barrel that those in Northwest Europe.

It's not a massive difference but one that does eat into

refiners' profits in Asia.

Refiners are better off currently in Asia, with complex

margins at $5.20 a barrel over Dubai, while in Europe, refiners

in Rotterdam are making $4.57 a barrel over Brent.

The Asian average for the past year is $7.38 a barrel, while

in Rotterdam it's $6.87, which also might explain the Saudi's

slightly cheaper pricing to Europe.

However, it's also clear that the Saudi move to raise OSPs

to Asia since September has eroded margins for the region's


In August, the complex margin averaged $10.39 a barrel, and

has dropped as low as $4.77 in the past five days.

The lower refinery margins, if maintained, may be enough to

cause the Saudis to reverse course for cargoes loading in

February, especially since peak winter demand will have passed.

(Editing by Miral Fahmy)

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