The deep cuts in Saudi Aramco's official selling price differentials for its crude grades loading in October and bound for Asia were largely within expectations, traders said Thursday, September 4, with some saying the cuts were bigger than expected.
All of Aramco's grades, except Arab Heavy, saw their differentials slashed to levels last seen in November 2010, with the Arab Heavy differential falling to a level last seen in January 2009.
"The cut is bigger than our expectations for each [of the] grades; [Saudi crudes] look more competitive than ADNOC grades," a trader at a Japanese refiner said.
A trader at an oil major said the cuts were "within expectations."
Another trader at a trading house said: "I expected this, but it is still awesome when it is out. We are back to 2010 [differential levels], when Arab Light is sub-zero [to Platts Oman/Dubai assessments]."
State-owned Aramco late Wednesday reduced the October OSP differential for its main export grade -- Arab Light -- by $1.70/barrel from September to a discount of 5 cents/b to the average of Platts Oman and Dubai assessments.
The differential was also set at a 5 cents/b discount in November 2010.
Traders surveyed by Platts had expected a cut in the differential of between 80 cents/b and $1.80/b, with the majority expecting around a $1/b cut.
"I am a bit surprised they reduced more than my expectation ... I expected Arab Light to be reduced by $1.20/b," a trader at a Southeast Asian refiner said.
The cuts to the OSPs had been widely expected as the first-month/third-month cash Dubai spread flipped from a backwardation into a deep contango during August.
The spread is a gauge of relative strength in the forward market for Middle Eastern sour crudes, and is understood to play a role in setting the OSP differential for Arab Light.
In the last five working days of August, the spread between October and December cash Dubai averaged minus $1.31/b, compared with an average of plus 43 cents/b in the last five days of July, according to Platts data.
Arab Medium, a heavier grade than Arab Light, saw its OSP differential for October cut by $1.50/b to a discount of $1.85/b to the average of Platts Oman and Dubai assessments.
The spread between Arab Light and Arab Heavy narrowed, in line with expectations, following a strengthening of the fuel oil crack in August.
Arab Heavy saw its OSP differential for October cut by $1.20/b to a discount of $4.30/b to Platts Oman and Dubai assessments.
This was the smallest cut among the export grades, but it is also the lowest the differential has been since January, 2009, when it stood at a discount of $5.80/b.
"Arab Medium and Arab Heavy are in line with my expectation to be cut less compared with Arab Light," the trader at the Southeast Asian refinery said.
Arab Extra Light saw the steepest cut, with the October OSP differential slashed by from September to a premium of $1.40/b. Traders Platts spoke to earlier were expecting cuts of around $1.25-2.15/b for the light, sour grade.
Despite a rise in the gasoil/Dubai swap to an average of $14.96/b in August, compared with $13.73/b in July, it has remained significantly lower than the $16.97/b average seen in the first half of the year, according to Platts data.
In addition, other light, sour grades like Murban and ESPO have seen their spot premiums come under steep pressure in August due to a narrowing of the cash Brent/Dubai spread, which has made alternative grades that price off of Platts Dated Brent more attractive to Asian refiners.
In August, the October cash Brent/Dubai spread averaged $1.86/b, compared to $2.33/b in July and $3.42/b for the first six months of this year.
