For the last couple days I was wondering if the world was unhinged or had I missed a memo.
OSP's? Who cares about Saudi Official Selling Prices? The futures are going down.
And it didn't help that the first take on the Saudi announcements was that their price, relative to Oman/Dubai sold in Asia, was going to be offered at a higher price.
And the press was babbling that Saudi Arabia was raising prices.
Arrrggghhh.
From the Financial Times:
Other factors are also at work, like market positioning
They used to pass with little comment – but not any more. All of a sudden Saudi Arabia’s oil pricing formula is the focal point of the oil market.
On Monday, the kingdom’s decision to lower official selling prices (OSPs) for US customers in December triggered a violent sell-off after commentators said it signalled the start of a battle for market share.
Ironically the same thing happened last month: only then it was a reduction in Saudi OSPs to Asia – the biggest buyer of Saudi crude – which sparked talk of a price war and weakness in oil prices.
So what are OSPs? And why is the market becoming obsessed with them?
Saudi Arabia sells its crude oil via Saudi Aramco, its state-owned company. Most of its oil is sold on annual contracts, which are priced with reference to regional benchmarks – the Dubai/Oman average in Asia, Argus Sour Crude Index (ASCI) in the US and the weighted average of Brent (BWAVE) in Europe.What Aramco decides each month are the price differentials for its various grades of crude. These range from super light, typically a premium product, to heavy crude oil, which usually fetches a lower price.
At the start of each month Aramco’s marketing arm informs the holders of the contracts what the differential, or adjustment factor, relative to the benchmark will be for loading in the following month.
Crucially, these differentials are calculated from oil product prices, according to Standard Chartered. This ensures crude oil is competitively marketed to refiners. This is known as netback pricing and links the revenue of the producer to the final market price for refined petroleum products.
For December US loadings, Arab Light was priced at a $1.60 premium to ASCI, a 45 cents reduction on the previous month, and Arab Heavy at a $2.20 discount, also down 45 cents.
To put these price cuts in context, the Arab Light differential was at a record premium in summer while Arab Heavy recorded its narrowest discount ever. Unsurprisingly, these differentials affected demand for Saudi crude, which dropped 337,000 barrels a day in August to 894,000 barrels a day – the lowest since December 2009.
To reverse some of those losses, Aramco has cut its US differentials to make its oil more attractive to refiners, say analysts and consultants....MORE
