Deep Oil Price Cut by Saudis Highlights Softer Physical Market

(Bloomberg) — A bigger-than-expected cut in official oil pricing to Asia by OPEC+ leader Saudi Arabia has reinforced signs of softer physical crude market in the largest consuming region.

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Saudi Aramco cut the official selling price for its flagship Arab Light crude to a $1.50-a-barrel premium to the regional benchmark for February, the lowest since November 2021. The $2-a-barrel reduction was deeper than foreseen, and follows a weakening of spot differentials for Middle Eastern crudes due to lackluster Chinese appetite and increased global supplies.

Oil capped the first annual loss since 2020 last year as non-OPEC+ production expanded, and traders looked ahead to slower growth in demand, including from key importer China. Crude’s weakness has prompted Riyadh to make a deep voluntary output cut, as well as complementary reductions from other members of the Organization of Petroleum Exporting Countries and its allies.

Saudi pricing has been lowered in line with the spot market, which may potentially boost margins for customers that use the kingdom’s cargoes as their baseload, refiners and traders said. Aramco’s pricing is typically followed by other major producers in the Middle East such as Kuwait and Iraq.

Still, at least three Asian customers said the price drop was unlikely to lead to requests for incremental deliveries from the Saudis as there are cheaper, rival supplies still available in the spot market. Two Chinese buyers said they won’t be lifting any term cargoes from the Saudis for next month.

Last month, Chinese refiners said they would receive less Saudi crude on-month for January loading. Asian crude buyers were also seen turning elsewhere after the kingdom reduced pricing of its key grade by only half the amount forecast.

–With assistance from Sarah Chen.

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