Seeking higher revenues, Saudi sets out stall for light crude oil

Kingdom plans to change oil pricing for European customers

DUBAI, April 4, (RTRS): Despite OPEC’s oil output curbs, Saudi Arabia has been offering its customers more light crudes while cutting heavy grades, a trend that could increase as the kingdom wants to maximise revenue and needs more heavy oil to power its own refineries.

This trend, if sustained, will impact refining margins particularly in Asia, and narrow the spread between light and heavy crude globally, industry sources and analysts said.

That would be bad news for sophisticated refiners, which value heavy grades because the lower cost of such oil results in higher margins, and good news for older, simpler plants that generally need light, sweet crude.

Saudi Arabia cut the April prices of light crude it sells to Asia for the first time in three months in an effort to shore up demand. The spread between Arab Light and Heavy was at $2.45 a barrel, the narrowest since September.

Before the OPEC output pact, in mid-November 2016, Brent futures for delivery in June 2017 were trading at a premium of around $4 per barrel over Oman futures. That has since narrowed to around $1.25.

The Organization of the Petroleum Exporting Countries, Russia and a number of other producers pledged to cut output by about 1.8 million barrels per day (bpd) from Jan 1, the first curb in eight years, to boost prices and erode a glut.

OPEC is discussing whether to extend the pact beyond June.

Saudi Arabia, the world’s top oil exporter, accounts for some 40 percent of the pledged OPEC curbs and has reduced output by more than 500,000 bpd to slightly below 10 million bpd, with cuts concentrated mainly in medium and heavy grades.

Those cuts, and increasing output of US shale oil, have increased the price of Middle Eastern heavy crudes for Asian delivery, making it economical for traders to ship crude from Russia, the Atlantic Basin and the United States to Asia.

Most of the heavier Saudi grades comes from offshore fields - mainly Safaniya, Manifa and Zuluf, which makes production costly compared to other Middle Eastern producers such as Iran and Iraq, industry sources said.

“You have to meet local demand first, and domestic refineries in Saudi Arabia need the heavy grades,” one industry source said.

“To sell the heavy grades at a competitive price against other producers, you would be producing at higher cost but selling at low profit.”

Saudi Arabia produces a range of crudes ranging from Arab Extra Light to Arab Heavy. It has nine refineries with processing capacity of about 2.9 million bpd, of which just above 1 million bpd of refining power runs on medium and heavy grades.

“Strategically, if they have to cut back a little they would prefer to cut back the expensive offshore production and sustain the lighter crudes,” said Sadad al-Husseini, an energy consultant and former senior executive at state oil giant Saudi Aramco.

Light, sweet crudes are more valuable to refiners because they are easier to process, while heavier and sour grades often trade at a discount.

Saudi Arabia burns more crude in summer for power generation, on average using 700,000 bpd for electricity to keep the population cool in the hottest months from May to August.

Saudi Arabia, the world’s top oil exporter, plans to change the way it prices oil for Europe from July, industry sources said, in an effort to increase the appeal of Saudi crude by making it easier for customers to hedge.

State oil giant Saudi Aramco will start pricing its European exports against the ICE settlement for the Brent benchmark after years of pricing its oil against the Brent Weighted Average (BWAVE), the sources said.

Both price references are part of the Brent benchmark used to price much of the world’s crude. The move, which takes effect on July 1, will allow buyers of Saudi crude in Europe to hedge better, the sources said.

“The Saudis are switching to the settlement as BWAVE is difficult to hedge,” said one industry source briefed on the matter who declined to be identified.

Two other industry sources confirmed the planned changed from July 1.

The European market, long dominated by Russian oil supplies, has been neglected by major OPEC producers due to poor growth as they focused on expanding Asian markets.

But as Russia moved aggressively into Asian markets and with a growing oil glut intensifying the fight for customers, OPEC members such as Saudi Arabia and Iraq ramped up sales to Europe, taking on former Russian customers such as Poland and Sweden.

In late 2015, Kuwait began pricing its European exports against another part of the Brent benchmark, dated Brent, after years of following Saudi Arabia in pricing oil against BWAVE.

The move was aimed at making its crude more competitive as oil producers fight for market share.

BWAVE is also used by Iran, while Iraq uses dated Brent.