(The criticisms expressed here are those of the author, Reuters columnist).
By Clyde Russell
LANCEMENT, Australia, 6 Aug (Reuters) – Saudi Arabia is increasingly caught up in the rock of weak expansion in demand for crude oil and the difficulty of keeping the source sufficiently price-constrained.
The world’s largest crude oil exporter has been behind the publication of its official monthly promotional costs (PSOs) for a week, possibly a sign that it is suffering with how to achieve what is an unattainable goal.
Saudi Aramco, the state-controlled oil giant, publishes PSOs around 5 each month, but the costs of the September shipment will not come until next week, Reuters reported Tuesday, presenting a source close to the issue.
The market expects Saudi Aramco to reach the PSOs of its consumers in Asia, who buy about two-thirds of the kingdom’s production.
A survey of Asian refineries estimated that the September PSO for Arab Light’s flagship crude would be reduced to a median of 61 cents consistent with the barrel, from the $1.20 consistent with the barrel premium to the Oman/Dubai average for shipping cargo in August.
This forecast is justified by the weakening of refinery margins in Asia, as the recovery in crude oil costs following the fall in OPEC Group production has been accompanied by a recovery in fuel demand and subtle raw material costs.
The profit margin, or crack, to make a barrel of Brent crude oil at a GL92-SIN-CRK refinery in Singapore increased to 75 cents on Wednesday, up from 74 cents the previous day.
However, the crack remains weak and is below the recent high of $4.69 consistent with the barrel on June 24.
Similarly, the profit margin for making a barrel of diesel, diesel structure block and other medium distillates remains low despite emerging at $6.25 on Wednesday, above the previous close of $5.56.
That’s still well below this year’s peak of $16.15 consistent with the January 3 barrel.
While Asia’s subtle fuel profit margins have weakened in recent weeks, crude oil costs have recovered, with Brent futures emerging 182% between the intraday low of $15.98 consistent with the barrel on April 22 and Wednesday’s close of $45.17.
In addition to the low profitability of its refining customers, Saudi Aramco has several concerns.
Compliance with production cuts agreed by members of the Organization of Petroleum Exporting Countries appears to be declining, with a Reuters survey indicating that the group’s production increased through 970,000 barrels according to day (b/d) in July.
Of the 10 OPEC members with production targets, overall compliance was 94% in July. The organization pumped 20.94 million b/d a month, up from 19.96 million b/d in June.
Producers allied with OPEC in the organization known as OPEC would possibly also increase production, with Russia expanding production to 400,000 b/d in early August.
Production cuts agreed by OPEC are expected to reach 7.7 million b/d in August from 9.7 million b/d from May to July.
As OPEC increases production, China’s outdoor Asian countries are still suffering to completely restart their economies amid the new ongoing coronavirus pandemic.
This means that fuel demand will most likely remain under pressure in much of the region, and high oil costs will not increase intake either.
Possibly, China would also provide some fear for Saudi Arabia and other exporters of primary crude oil, as its record import execution per month is expected to end in August.
Imports from China in recent months have been backed by the arrival of an avalanche of crude oil that bought the brief war between Saudi Arabia and Russia that broke out in March and ended in early April with a new production relief agreement.
China’s crude oil imports in July are expected to be approximately 13.39 million b/d, according to refinitiv Oil Research estimates, eclipsing June’s all-time high of 12.9 million b/d, which in itself exceeds the previous record of 11.3 million b/d in May.
Refinitiv estimates that China’s imports in August will fall to 13.05 million b/d when the last reasonable crude oil arrives and port congestion is nevertheless eliminated.
As of September, Chinese imports may fall further, especially if regional subtle fuel costs remain low, reducing the incentive for Chinese refineries to export their surplus products to domestic needs.
Overall, Saudi Arabia faces a dubious request from primary importers in Asia, as well as the expansion of OPEC Group production, two bearish points that would possibly tip the balance in favor of ensuring the share of the market that bears most of the value burden increases through the discipline of origin. (Editing via Richard Pullin)
All quotes were delayed for at least 15 minutes. See here for a complete list of operations and delays.
© 2020 Reuters. All rights are reserved.