The oil market has fully entered wartime logic: Saudi Arabia raises export premiums to record levels

The conflict in the Middle East continues to escalate, and the Strait of Hormuz is nearly being shut down, causing wild swings in the energy markets. Saudi Arabia has already decided to raise the crude oil premium for sales to Asia to a record level.

According to leaked price lists, next month Saudi Aramco’s flagship product, “Arab Light,” has had its premium price for Asian refinery buyers increased to a level that is 19.50 dollars per barrel higher than the relevant regional benchmark.

It needs to be pointed out that this level is far below the range that outsiders have estimated. Traders explained that because the war has caused sharp fluctuations in the Middle East benchmark price, and oil prices fell sharply at the end of last month, this month’s pricing is especially difficult to judge.

The regional benchmark Saudi Arabia is referring to is made up of Dubai pricing and Oman crude oil futures. Last month, this combination became increasingly unstable, because the war caused a shortage of spot supplies used to assess prices, distorting these benchmarks.

Some Asian refiners have even proposed alternatives, including switching to global benchmark Brent crude oil to price Saudi crude.

Meanwhile, the war has also forced changes to the global crude oil transportation patterns. With the closure of the key shipping lane, the Strait of Hormuz, the conventional routes for millions of barrels of crude oil from Gulf producers such as Saudi Arabia have been cut off.

As an alternative, Saudi Arabia has shifted most of its exports to Yanbu port in the Red Sea. This port is about 1,200 kilometers away from its traditional loading port of Ras Tanura.

But Saudi Aramco’s official prices still follow a pricing mechanism based on shipments from Ras Tanura, which further increases uncertainty in buyers’ actual procurement costs.

At present, Saudi Aramco has asked customers to submit demand requests for pickup from different ports separately, and said that it supplies Arab Light crude oil only at Yanbu port.

Among oil-producing countries in the Persian Gulf, only Saudi Arabia and the United Arab Emirates have large-scale export alternative routes that bypass the Strait of Hormuz.

Saudi Arabia’s oil pipeline to the Red Sea is currently operating at full capacity, with transport capacity of 7 million barrels per day, while crude exported via Yanbu port is close to 5 million barrels per day, accounting for about 70% of total export volume before the outbreak of the war.

Saudi Aramco CEO Amin Nasser said during a telephone meeting on March 10 that the company has significantly cut production of medium and heavy crude oil and instead is focusing on selling light and ultra-light crude oil sourced from Yanbu port.

（Source: Caixin Global / Caixin Global）