Saudi Arabia’s Significant Oil Price Cut Points to Softening Physical Market

Saudi Arabia, as the leading member of OPEC+, has implemented a considerable reduction in official oil pricing to Asia, signaling a softer physical market in this crucial region.

Saudi Aramco announced a $2-a-barrel reduction in the official selling price for its flagship Arab Light crude, setting it at a $1.50-a-barrel premium to the regional benchmark for February. This move, the most substantial since November 2021, exceeds earlier expectations and reflects the impact of lackluster Chinese demand and an increase in global oil supplies, leading to weakened spot differentials for Middle Eastern crudes.

Last year marked the first annual loss for oil since 2020, attributed to the expansion of non-OPEC+ production and concerns about a slowdown in demand growth, particularly from major importer China. Responding to the weakness in crude prices, Riyadh implemented significant voluntary output cuts, joined by other OPEC+ members. Concerns persist among traders about potential global economic slowdown in 2024, further limiting oil consumption.

According to Serena Huang, lead Asia analyst at Vortexa Ltd, “Amidst the weakening of the global economic outlook and the fading of seasonal demand strength, it has not come as much of a surprise that Saudi is cutting its OSPs [official selling prices] so deeply.” She emphasized that the move is crucial for Saudi Arabia to defend its market share.

The adjustment in Saudi pricing aligns with the spot market, potentially improving margins for customers relying on the kingdom’s cargoes as their baseload. Typically, Aramco’s pricing sets a precedent for other major Middle Eastern producers like Kuwait and Iraq.

However, despite the price drop, at least three Asian customers indicated that it would not lead to requests for additional deliveries from Saudi Arabia, as cheaper alternative supplies are still available in the spot market. Two Chinese buyers mentioned they won’t be lifting any term cargoes from Saudi Arabia for the upcoming month.

In the previous month, Chinese refiners had already communicated a reduction in Saudi crude for January loading. Additionally, Asian crude buyers had turned to other sources after the kingdom reduced pricing for its key grade by only half the forecasted amount.

The announcement of the oil price cut led to a decline in crude futures, with the global benchmark Brent dropping by as much as 1.5% to $77.58 a barrel on Monday. Brent had experienced a 19% collapse in the final quarter of 2023 as the market outlook grew increasingly uncertain.

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