The market share battle is over, at least as far as Saudi Arabia is concerned. Indications are there that cash flow optimisation is the new mantra in Riyadh. For the second month in a row, Saudi Arabia has confounded pundits, by raising the official selling prices (OSP) of its premier grade Arab Light crude.

Last Wednesday, Saudi Aramco announced setting the June price of its Arab Light crude at a premium of $1.90 a barrel to the regional benchmark, raising the price for its premier crude for Asian customers by $0.70 a barrel versus May to a premium of $1.90 a barrel to the Oman/Dubai average. Consequent to the decision, the Saudi benchmark crude in Asia is now priced at its highest level since August 2014.

Aramco sets the prices of its crude on the basis of its overall view of the market, refining margins and other key global indicators. Typically it sets the Arab Light crude price each month based on the price curve between the first-month and third-month cash Dubai prices published by S&P Global Platts.

The Kingdom’s prices are a key yardstick for other regional producers in the Gulf. Crude oil traders tend to keep a close eye on it. The Saudi pricing usually sets the trend in the OSPs of the other Middle Eastern producers, so they are closely watched by the market.

The current announcement has confounded the pundits. As per a Reuters survey, a majority of analysts had expected Aramco to implement a modest price hike for June after a surprise increase for May loadings.

In April too, Aramco baffled analysts after it unexpectedly raised the official selling price of Arab Light crude to Asian refiners for May loadings.

Deviating from its usual pricing formula, Saudi Aramco increased Arab Light’s official selling price for May by 10 cents per barrel to a premium of $1.20 a barrel to the average of Oman and Dubai quotes.

This is also against market expectations. Participants in a Reuters survey conducted just before the announcement in April were in fact, expecting a cut of between 50 - 60 cents a barrel in Aramco prices.

Some major Asian customers of Saudi Arabia are seemingly upset at the new price and are reacting to the decision of raising prices for two months running – against most expectations.

China International United Petroleum and Chemicals Co (Unipec), the trading unit of one of the world’s biggest refiners is definitely not happy with the Saudi pricing decision. Unipec retaliated by announcing it would cut its June imports of crude from Saudi Arabia by 40 per cent. Reuters quoted a company official as saying that the (Saudi) grade is now considerably overvalued compared to other Middle Eastern crudes. The recent move by Unipec followed its earlier decision to buy fewer barrels from the kingdom in May as well.

Besides Unipec, a source from another two refineries in northern Asia was quoted as saying in the press that they too will be cutting their imports from Saudi Arabia by 10 percent as they were having a hard time grasping how the Kingdom is calculating the price for its most popular grade.

These refineries, cutting down on Saudi crude imports, were of the opinion that the Kingdom’s prices were unreasonably high and do not follow the settled market methodology.

China, the world’s biggest oil importer and an important market for the global crude producers, has so far been alone among Asia countries in publicly shying away from Saudi supply due to the pricing. Others may prefer not to state publicly, their buying intentions — for obvious reasons.

With Saudi prices so high, it may prove more viable for many to ship alternative grades such as Russia’s Urals, WTI Midland from the US and Kazakhstan’s CPC Blend to Asia, the world’s biggest oil buying region, the Unipec official underlined.

Lower sales to China would mean Saudi Arabia will continue losing market share in the country where it’s already been dislodged as the top supplier by Russia and has seen competition from supplies flowing from Africa to the US.

Saudi Arabia is apparently reading into the market from a perspective much different from others. And indeed Riyadh knows the mathematics well, one can’t deny. Yet, despite that — and apparently in its quest for petrodollars — Riyadh is getting to overlook the ongoing global market share battle and the long-term dynamics of the global crude equation.

Despite some immediate gains accrued, the move may turn out to be harmful to the abiding interests of the oil kingdom.

Published in Dawn, May 6th, 2018