Will demand destruction fears pressure Saudi Aramco’s June OSPs?

Oil prices ended the 9th volatile week on an upward momentum. Brent crude price closed the week higher at $109.34 per barrel. WTI crude price ended the week higher at $104.43 per barrel.

Interestingly, the claimed demand destruction in China and the idled 3 to 5 million barrels per day (bpd) of refining capacity for spring maintenance didn’t weigh down on oil prices.

Global oil markets wait for OPEC+ meeting end of the week as it’ll be very interesting to see the impact of the supply disruption from Russia on the upcoming OPEC+ meeting on the 5th of May.

Russia’s crude production is down by almost 1 million bpd compared to February levels and the total OPEC+ output for March was 1.45 million bpd below the agreed level. This is in addition to the oil demand outlook downward adjustments from OPEC, IEA and EIA despite the upcoming summer high demand season for gasoline and the tight crude oil and petroleum refined products storage while refining margins remain high.

The latest figures from the Commodity Futures Trading Commission (CFTC) on April 26, 2022, showed that long positions on crude oil futures on the New York Mercantile Exchange (NYMEX) at 425,549 contracts, up by +1,227 contracts from the previous week (1,000 barrels for each contract).

Some market participants and oil media outlets try to pressure Saudi Aramco to lower its June OSPs because of demand destruction fears. However, its pricing methodology is consistent regardless of claiming oil demand destruction or claiming sour crude complex weakens.

Some oil media outlets have forecasted that Saudi Aramco’s June official sales prices (OSP) most likely to drop amid weakening market structure and weakening sour crude grade complex. This expectation came after Saudi Aramco raised its May OSP to the highest ever recorded between $2.70 and $4.40 a barrel amid a tight physical market.

Saudi Aramco issues its monthly official sales price (OSP) one month ahead. For instance, June OSP is sent in early May and represents oil barrels that are loaded in the month of June but processed at refineries during July, depending on the logistics and transportation.

Aramco’s monthly OSPs 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.

That being explained, Saudi Aramco will continue to apply its consistent pricing methodology that relies on factual numerical and analysis. Conversely, the claimed demand destruction isn’t based on actual facts but only on fears and bearish sentiments.

Faisal Faeq

Energy Adviser (former OPEC and Saudi Aramco)

Twitter: @FAISALFAEQ