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Saudi Arabia made some of the biggest price increases for crude exports in at least two decades, doubling down on its strategy to bolster the oil market after OPEC+ producers extended historic output cuts.
The steepest jump will hit July exports to Asia, state producer Saudi Aramco’s largest regional market, according to a pricing list seen by Bloomberg. Overall, the increases for Saudi crude erase almost all of the discounts the kingdom made during its brief price war with Russia.
The sharp price increases show that Saudi Arabia is using all the tools at its disposal to turn around the oil market after prices plunged into negative territory in April. As the price setter in the Middle East, the increases in its official prices may be followed by other producers.
Tighter crude supply is helping repair an oil market battered by the coronavirus. Unprecedented output cuts led by the Saudis and Russia boosted prices in May, and the OPEC+ group decided Saturday to extend those limits through July. Brent crude, down 36 per cent this year, has clawed back some of its losses and ended trading on Friday at more than US$40 a barrel.
But the profits that oil refiners make from processing crude into fuel are struggling to keep up with the rising market, and the sharp Saudi price hikes are likely to exacerbate that problem. Representatives for refineries from Europe and Asia expressed concern and said the pricing would crush margins.
Saudi Arabia unleashed a price war in March when it slashed official selling prices by the most in three decades. The kingdom took that drastic step after failing to reach an agreement with Russia to extend production cuts in the face of the pandemic’s destruction of oil demand.
After Tweets, phone calls and top-level consultations, OPEC+ returned to negotiations and hammered out the biggest output curbs in history, pledging to take nearly 10 million barrels a day off the market. U.S. production plunged by roughly two million barrels daily as low prices drove producers to shut wells.
OPEC+ chose on Saturday to renew production limits at almost the same level, instead of tapering them as planned at the end of June. Aramco, which typically announces pricing on the fifth day of each month, had delayed its July numbers until after OPEC+ members made their decision.
Saudi Arabia sells its crude at a differential to oil benchmarks, announcing every month the discount or premium it’s charging to global refiners. The so-called official selling prices help set the tone in the physical oil market, where actual barrels change hands.
With China’s demand for crude now rising, the Saudis are raising prices. The month-on-month increase in the official selling price for flagship Arab Light crude to Asia, which accounts for more than half of Saudi oil sales, is the largest in at least 20 years. Aramco raised Arab Light to Asia by US$6.10 a barrel to a premium of 20 cents US over the benchmark.
It raised July pricing for all grades to Asia by between US5.60 and US$7.30 a barrel. That compares with an expected increase of about US$4 a barrel, according to a Bloomberg survey of eight traders and refiners.
Buyers in the U.S., the Mediterranean region and Northwest Europe will also pay more for oil.