Saudi cuts oil price to keep Asia share as Covid pummels demand in India
But the reduction is unlikely to stop fuel prices from creeping up as they have started doing after an 18-day gap. Signs of demand recovery from China and the US, which saw a sharp drawdown of crude inventories last week and rising refinery output, are partly working off Covid concerns to keep crude firm – at least for the time being.
The cut could, however, be the sweetener Indian refiners had been looking for. They may now resume lifting monthly deliveries of Saudi crude as per commitment. The refiners had last month reduced offtake of Saudi oil to take advantage of cheaper littoral supplies from the spot market and new producers.
The OSP is set every month for oil supplied under term contracts. Other Gulf producers take a cue to tweak their prices. The OSP adjusts the difference in quality between particular Saudi crudes and the monthly base price of the Dubai-Oman basket quoted in Singapore. The base price is derived from a rolling average of 30-month quotes.
Aramco also cut shipment prices for parts of Europe and the Mediterranean but raised for the US. The move carries a clear signature of Covid resurgence and its impact on the company’s key consumers, underlining nervousness over future demand from India and Japan – the world’s fourth-largest consumer that is also struggling with rising Covid cases, as are Thailand and Cambodia.
India’s April diesel consumption fell nearly 10% and petrol nearly 5% from the same month of 2019 as states began locking down areas to contain the pandemic. Demand is expected to fall further as local curbs turn into state-wide lockdowns. No wonder global benchmark Brent slipped 43 cents as the hope of an early peaking of Covid cases in India receded with yet another record number of cases on Thursday.
Parts of Europe and Brazil also are witnessing high caseloads. In contrast, the US is opening up on the back of rapid vaccination and people looking forward to driving holidays next month.
But Yaw Yan Chong, director of oil research (Asia) at Refinitiv, believes the oil market is on the way to recovery in spite of the widespread Covid wave, especially in India. The recovery, he says, is largely led by rising demand from the main Asian importers amid controlled supply by the Suadi-led OPEC+ grouping.
For Indian refiners and much of other Asian buyers, West Asia, which accounts for 60% of India’s oil imports, is hard to beat as a cost-effective source because of proximity, low shipping costs, capacity to supply committed quantities. Joint procurement is also a non-starter because of the individual need of each refiner. For the same reasons, the US will not always be a cost-effective source, though it has become the second-largest supplier as India diversifies sources. African producers have issues over meeting their commitments.