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Explaining Saudi Arabia’s Oil Price Drop

Saudi Arabia

Usually, when Saudi Arabia issues its official selling prices (OSPs) for the upcoming month, all the Middle Eastern crude exporters take notice and follow suit. Yet what happens if the Saudi national oil company Saudi Aramco delays a decision well beyond the usual timeframe (first 5 days of the preceding month) and then surprises analysts with a price drop? According to its official statement, Saudi Aramco was delaying the release of September OSPs because of the Islamic religious holiday Eid al-Adha which will end this Saturday. On Thursday evening, however, Saudi Arabia surprised the market by issuing its September OSPs. The last time Saudi Aramco took its time to deliberate it flash crashed its April 2020 OSPs by $5-6 per barrel, effectively starting a price war the impacts of which are still being felt all around us.

The oil market has undergone quite a change since April though – the coronavirus is now a firm reality of everyday life and some oil firms have learned to live with; demand in some parts of Asia such as South Korea and Europe has been coming back online, while India, Latin America, and others are struggling to come out of lockdown. Meanwhile, OPEC+ production quotas are less stringent than they were just a couple of months ago. All of that combined has brought producers to a new decision point – they need to confront weak refinery margins as the immense quantities of stored crude are being digested by refiners. Cutting production is no longer an option…

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