Saudi oil pricing in disarray as buyers seek alternatives

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The Iran war has thrown conventional pricing for Saudi Arabian crude oil into disarray, with tense buyers in Asia seeking to steer the kingdom towards alternative mechanisms for supplies as oil prices soar, according to traders familiar with the matter.

State producer Saudi Aramco is in the process of finalising the cost of its oil for May-loading, with the price list poised to be delivered to buyers within days.

Based on the usual pricing measure off regional benchmarks, the premium for flagship Arab Light is set to spike to an unprecedented level of about US$40 a barrel, the traders said. That compares with US$2.50 for April.

Some refiners in Asia have already asked Aramco to index its crude against Brent futures, but other alternatives have been floated, traders said. That includes using oil prices on the Shanghai Futures Exchange and then deducting shipping and other associated costs, or even taking reference from other crudes such as the United Arab Emirates’ Upper Zakum.

S&P Global Energy has been publishing daily prices for that grade in March, they said.

Aramco’s monthly contract prices are typically set as a differential to an underlying benchmark, which is comprised of an S&P Global Energy-assessed Dubai price, as well as Oman crude futures on the Gulf Mercantile Exchange.

Some spot-market deals, which would ordinarily be indexed to the Dubai marker, have already been completed using alternatives, including Brent-related financial instruments, according to traders.

The process of setting official selling prices usually involves informal talks with refiners so that Aramco can gauge the state of the market, though its unclear how much influence that has on the eventual outcome.

This time, discussions have taken on added urgency, as buyers in Asia grapple with concerns around constrained supply, and higher prices that are crimping margins.

Talks between Aramco and its customers are ongoing and no final decisions on pricing have been made yet, said the traders from refiners that import regular volumes from Saudi Arabia. They added that should prices be set around the US$40 a barrel premium level, that will likely lead to a reduction in purchases.

Aramco declined to comment.

The highest level that Aramco previously set Arab Light to Asia at was a premium of US$9.80 a barrel in August 2022, according to data compiled by Bloomberg stretching to 2000.

Pricing for Aramco’s other grades such as Arab Extra Light, Arab Medium and Arab Heavy faces greater hurdles.

Flows of those grades have all but halted due to the effective closure of the Strait of Hormuz, with the Yanbu pipeline that carries oil from the east of the country to western ports for export only transporting Arab Light, traders said.

Still, the alternative Yanbu route is unable to cover all the losses from the Hormuz closure, and Saudi Arabia’s oil sales to Asia’s two-biggest buyers – China and India – are set to be lower than usual in April. BLOOMBERG