Did Bearish Sentiments Pressure Aramco’s June OSPs?

*By Faisal Faeq

Saudi Aramco raised the June official selling price (OSP) of its flagship Arabian Light crude oil destined to Asia by $0.90/bbl to a $2.90/bbl premium to the Oman/Dubai average, the third consecutive monthly increase. The June OSP hike is related to a wider backwardation for the first and third months for Platts Dubai and DME Oman amid tighter supplies in the physical sour crude grades, unlike the light sweet crude grades.

Some market participants and oil media outlets have tried to pressure Saudi Aramco to lower its June OSPs because of unjustified bearish sentiments that put downward pressure on oil prices. Oil prices have plummeted and made the biggest weekly drop in three months in the worst performing week in seven months. Oil prices’ steep weekly drop was related to futures market weakness amid huge speculators selling off, not the physical market for SPOT barrels.

In the previous OSPs for the month of May, Aramco set its OSP of Arabian Light crude oil destined to Asia for May by $0.30/bbl to a premium of $2.00/bbl over the Oman/Dubai average, the benchmark off which Arabian Gulf crude oil destined going to Asia is priced. May monthly OSP increase of $0.30/bbl was widely expected by traders, though it was the second monthly consecutive increase for the grade. However, the m-o-m deepening backwardation, as per Saudi Aramco’s monthly OSP pricing methodology, should have resulted in much higher OSPs. Other factors must have been considered to alleviate Aramco May OSP.

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.

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

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.