Days before it is slated to announce pricing for May-loading cargoes for Asia, the world’s top crude exporter, Saudi Arabia, is unsure how the typical price mechanism could apply and is under pressure from buyers to switch to alternative pricing, as the war is upending oil flows and roiling regional benchmarks.
Saudi Arabia typically announces around the fifth of each month its crude pricing for the following month and doesn’t comment on price changes.
It also sets the tone for the pricing of the other major oil producers in the Middle East, influencing the pricing policy of about 9 million barrels per day (bpd) of exports from the Arab Gulf region. Now most of these are trapped and unable to move past the Strait of Hormuz.
The pricing mechanism has long been to price the Saudi flagship Arab Light crude, and all other grades, to Asia against the average of the Oman/Dubai prices—the Middle Eastern benchmarks.
But since the war has now upended all crude and petroleum flows in the Middle East, with the Strait of Hormuz off the table as an option for Saudi crude, the pricing mechanism is in disarray with the Dubai prices soaring, but physical supply nowhere to be seen.
Related: 5 Stocks to Buy Now That The Strait of Hormuz is Closed
Saudi Arabia and Asian buyers are still negotiating on the pricing for Saudi crude loading for Asia in May, and buyers insist that the world’s biggest crude oil exporter change the mechanism, traders with knowledge of the talks told Bloomberg on Monday.
If the conventional pricing mechanism is followed, the premium for Arab Light would soar to as much as $40 per barrel over the average Oman/Dubai, up from a $2.50 per barrel premium for the April loadings, the traders said.
Asian refiners have already priced some orders for U.S. crude oil against the ICE Brent benchmark instead of the typical pricing on Dubai crude, as the Middle Eastern benchmark has seen wild fluctuations amid choked physical supply from the Persian Gulf.
For April, Saudi Arabia is slashing its crude oil exports to Asia, for a second month in a row, as the de facto closed Strait of Hormuz is stranding nearly half of the supply from the world’s top crude exporter.
Saudi Arabia is seeking to redirect as many barrels as possible to the Yanbu port on the Red Sea. This export route doesn’t need passage through the Strait of Hormuz, where Iran is now selectively and politically ensuring safe passage through the chokepoint for some vessels.
By Charles Kennedy for Oilprice.com
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