Saudi Arabia has increased its official selling prices for all crude oil grades for Asian buyers with delivery in June as a supply crunch resulting from U.S. sanctions on Iran and Venezuela opens an opportunity to boost revenues.
Bloomberg reports the price for Arab Light with a June delivery date is now the highest in almost a year, with Arab Medium selling at the highest price since the end of 2013, and Arab Heavy at a six-year high. Heavy grades are in particularly great demand among Asian refiners and supply is falling because of Venezuela’s continued production decline and political woes that are aggravating the situation.
According to a Reuters update, Saudi Arabia’s Arab Light for June delivery sells at a premium of US$2.10 per barrel to the Oman/Dubai average, up by US$0.70 per barrel from cargoes for May delivery. Riyadh also raised the price of this most popular among its grades for Europe, by US$0.80 a barrel from the price of shipments for May delivery. The price for oil exports to the United States, however, was reduced.
The move by Riyadh is obviously a response to the market tipping into sellers’ favor after the United States removed Iran sanction waivers granted last November to eight of the country’s largest oil buyers. Saudi Arabia needs higher oil revenues to fund its ambitious economic diversification program and shrink its budget deficit. It is likely to get them, too, at least for a while.
Last week, Bloomberg quoted sources close to Asian refiners as saying they were ordering additional cargoes of Saudi Arabian crude for delivery in June and July to replace lost barrels from Iran. It was these additional orders that likely motivated Riyadh’s decision to raise prices for next month deliveries. However, how long this willingness to pay more for Saudi crude will last remains uncertain.
India and China, two of the world’s three largest oil consumers, have already voiced their concern about the end of sanction waivers and while this is unlikely to shake Washington’s resolve to bring Iranian oil exports to zero, it is likely to force India and China, as well as other importers, to seek alternatives to costly Saudi crude, if, of course, prices remain high.
Storage is an obvious step, after China, at least, made the best of low oil prices to fill up its tanks. India is in a worse situation because it is a lot more dependent on imported oil than China. What’s more, using inventories, Reuters authors Rania El Gamal and Dahlia Nehme note, will ultimately support higher prices for longer: lower inventories invariably push prices higher.
If prices go much higher, however, there is bound to be a reaction from President Trump and then from India’s government. Trump is notorious for his quick Twitter reaction to price spikes, and India’s Petroleum Minister has also been quick to complain about rising prices when they leave India’s comfort zone.
What this means is that the higher-for-longer scenario is unlikely to play out, despite sanctions and Saudi Arabia’s intention to keep production in check for the time being. Sooner rather than later, a cap will be put on prices, whether by Riyadh or another large producer, with market share once again taking priority over temporarily higher revenues.
By Irina Slav for Oilprice.com
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