What influences the price of a barrel of Saudi oil?
Increases in Saudi Aramco’s official selling prices (OSP) earlier in the summers has stirred up interest among some quarters of the oil trade press — so it may be a good time to look at how those prices are set. Aramco sets its price for Arabian crude oil grades at the start of each month for deliveries for the next month. Most other Gulf oil exporters follow the same path, taking advantage of Saudi Aramco’s earlier announcement to set their prices competitively.
The monthly OSP is based on a consistent pricing formula which considers month-to-month changes in refining margins, market movements, and adjustment factors that take into consideration crude oil quality and the point of sale as well as refining yields. One of the most important factors in this process is consultation with its own customers, that is to say the refiners who process Saudi crude and turn it into products such as diesel and gasoline.
It is worth highlighting that Asian refiners tend to prefer sour crude grades from the Gulf to maximize their revenues. In recent years, most of the new barrels that have been added in the market are light “sweet” grades mainly from the US shale oil producers.
“Sweet” is industry jargon describing crude oil grades that typically have less than 5 percent sulfur content. Naphtha and gasoline (light distillates) are produced from the lighter sweet crude grades while refiners make more money on middle distillates such as diesel, jet fuel or kerosene that are produced from the sour crude grades.
Some analysts perceived the increased selling prices during May, June and July as simply taking advantage of tighter supplies arising from ongoing OPEC output costs as well as sanctions on Venezuela and Iran, which pushed up demand for Arabian Gulf sour crude grades.
Asian refiners tend to prefer sour crude grades from the Gulf to maximize revenues.
But this is not just about making hay while the sun shines. The selling prices for crude are also influenced by the Dubai forward price market, which has been in “backwardation” — the industry term that describes a situation where the current spot price for crude is higher than in future months. This has kept prices higher than they otherwise may have been.
Though Saudi Arabia is the largest oil exporter in the world, Saudi crude oil prices are still linked to international benchmarks and Saudi Arabia does not yet have one.
Saudi Aramco’s price marker for its crude oil exports to Asia is the average of Platts Dubai and DME, as the Dubai benchmark refer to the physical price of crude oil loading in the Arabian Gulf through the month of assessment. Then slight adjustments are made to allow for changes in refining margins and the Dubai forward market structure. These tend to be only fractional adjustments. So while the price increases earlier in the summer may have garnered some attention, the major Asian refiners appear unperturbed.
• Faisal Faeq is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco. Twitter:@faisalfaeq