Saudi oil price hike shows Asia demand strength

07/10/2011 00:00 AST

The increasing disconnect between oil markets in Asia and the West was highlighted again by Saudi Arabia, which boosted export prices for a region that is the world's last hope for growth while cutting those for Europe and the United States.

And it wasn't just a minor tweak the Saudis gave Asia for crude cargoes for November lifting: they raised the premium for the main Arab Light grade to a record high over the regional benchmark Oman/Dubai price.

This increase came despite a fire that shut down Royal Dutch Shell's 500,000 barrel a day refinery in Singapore, which caused the company to cancel the delivery of at least four million barrels of oil from Saudi Aramco.

While Shell's closure of its largest refinery for repairs roiled spot markets by boosting the premium of Brent oil over Dubai as traders feared excess supplies of Middle East crude, this sentiment didn't last long.

The Saudi decision to raise premiums for Asian refiners, who buy more than half of the kingdom's crude exports, shows its confidence in the strength of Asian demand.

Arab Light was raised to a premium of 2.70 US dollars a barrel over Oman/Dubai, 35 US cents above the previous record high of $2.35 in November 2007.

At the same time, the price for November-loading Arab Light for US customers dropped to a discount of 20 cents a barrel to the Argus Sour Crude Index from a premium of 20 cents the prior month.

For Northwest Europe, the discount doubled to $1.40 a barrel to the weighted Brent average for November from a discount of 70 cents for October cargoes.

The obvious conclusion from the Saudi pricing is that they are charging more to customers in Asia because demand from the region is strong, while they are cutting prices for Europe and the United States to try and hold up demand in those regions.

This fits with what physical oil traders in Singapore report, namely that there is no let up in demand for actual oil cargoes in the region, Shell's travails notwithstanding.

Furthermore, the premium of physical Oman crude cargoes over the benchmark Dubai price has remained at elevated levels, trading at $2.50 a barrel on Wednesday, slightly down from $3 on Sept. 29, the peak so far this year.

But what is more interesting is that this spread slumped to a discount of $1.75 in September 2008, at the height of the global financial crisis and as crude was plunging from its record above $147 a barrel down to around $34 in December that year.

If demand for crude in Asia was showing any sign of easing, it would be expected that the premium for physical cargoes would be eroding rather rapidly, which is so far not the case.

A further sign that demand remains strong is that Chinese refiners booked eight more Very Large Crude Carriers, each capable of holding some two million barrels of oil, in the spot market in September than they did in August.

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Al Watan