Saudi Aramco issues its monthly official sales price (OSP) one month ahead. For instance, September OSP is sent in early August and represents oil barrels that are loaded in the month of September but processed at refineries during October, depending on the logistics and transportation.
Therefore, September barrels will be processed during the upcoming autumn refinery maintenance season that could curb crude oil imports, as some market participants have suggested. The maintenance season is undertaken in October and November ahead of winter’s high demand for heating oil.
Market participants reacted to Saudi Aramco’s September official sales price (OSP) in different ways after the company increased OSPs for barrels heading to Asia in September for the second consecutive month, which reflected market fundamentals and had nothing to do with OPEC+ plans to gradually increase output.
Though Saudi Arabia is the largest oil exporter in the world, its crude oil prices are still linked to international benchmarks and the Kingdom does not yet have one. The monthly OSPs usually represent only less than 5 percent of the oil price then added or subtracted from those benchmarks.
Aramco’s monthly OSP is based on a consistent pricing formula which considers month-to-month changes in refining margins, benchmarks forward curves (for Asia OSPs), related crudes’ competitiveness, an adjustment factor that takes into consideration crude oil quality and the point of sale and a timing mechanism that stipulates when the value of the formula is to be calculated.
One of the most important factors in this process is consultation with its customers, who are the refiners who process Saudi crude and turn it into refined products such as Naphtha, diesel, gasoline, jet fuel, etc.
Saudi Aramco’s August and September OSPs were an indication of the physical oil market tightness that rightly reflected in the steeper backwardation futures forward curve, higher refining margins, and inventories draw.
Though Saudi Arabia is the largest oil exporter in the world, its crude oil prices are still linked to international benchmarks.
Faisal Faeq
Stronger refining margins, coupled with a widening Exchange of Futures for Swaps (EFS) spread, make crude priced against the Dubai benchmark economically attractive for the Asian refiners compared to the Brent-linked crude. This clearly shows the strength of the prices of the prompt SPOT barrels in the Arabian Gulf.
That being said, Asian refiners are showing a strong appetite for Arabian Gulf sour crude grades, which was reflected in the Brent/Dubai EFS.
Still, September Asia OSPs hikes of between $0.20 and $0.60 per barrel were modest and could have been much higher but Aramco pricing methodology is consistent despite the Organization of the Petroleum Exporting Countries (OPEC) output strategy.
• Faisal Faeq is an energy adviser and columnist. He formerly worked with Saudi Aramco and OPEC Secretariat. Twitter:@FaisalFaeq.
