The largest oil producer in the Middle East, Saudi Aramco, raised official selling prices for all crude grades to levels near the high end of market's expectations, traders told S&P Global Platts Jan. 7.

Saudi Aramco raised OSPs for all its Asia-bound grades by 20-70 cents/b, with Super Light, Extra Light and Light grade OSPs raised by 60 cents/b, 50 cents/b and 70 cents/b, respectively, to the average of Platts Dubai and DME Oman crude in February. The OSPs for medium and heavy grades were raised by 40 cents/b and 20 cent/b, respectively, to premiums of 75 cents/b and 30 cents/b to the Platts Dubai and DME Oman average.

In the recently concluded OPEC+ meet, Saudi Arabia sprung a surprise on the market by agreeing to cut its production for February and March by 1 million b/d each, allaying growing concerns of an oil glut as the coronavirus pandemic spread worsens around the globe.

With announcement of the production cut, traders expected a rise in OSPs by the producer.

“It’s an impressive move by Aramco. First the big cut and now the hike in prices.” said a trader in Singapore. “[I] expected a nominal hike of 30-40 cents/b across all grades but surely not this high.”

Concerns, however, loom large on demand appetite with mixed signals from the market largely revolving around Asian buyers sustaining market fundamentals, which have strengthened over the past two months.

A key price indicator for the Middle East sour crude market, the cash Dubai-futures spread, averaged at a premium of 56 cents/b in December, up from an average premium of 18 cents/b in November, Platts data showed.

In December, Asian giants India and China went on a buying spree through tenders for various crude oil grades. However, by the end of the trading cycle, both were seen opting for cheaper arbitrage barrels over Middle East supplies.

“Demand is looking shaky. Lockdowns are increasing in Japan and virus is now spreading in China too with quarantine periods up to three weeks. Not sure if these countries will buy as much as last month,” said the trader.

Apart from the pandemic, other factors such as cheaper arbitrage from the West and seasonal refinery turnarounds have raised further doubts about Asian demand.

Refineries in Japan and South Korea are being compelled to opt for turnarounds as fresh virus outbreaks reduce domestic demand, further choking the appetite for crude oil imports.

“Many Japanese refineries will opt for turnarounds during April and May. With Saudi cutting supplies, it’s a greater incentive to buy less from the spot market as allocations are impacted,” said a trader with a North Asian refiner.

While Indian refiner IOC commenced tender purchases for January, the option to buy West African crude is a harsh reminder of the threat of arbitrage crude weighing down on demand for Middle East grades.

“Saudi may have cut but Russia will pump more even if it’s a marginal amount. West is suffering from the virus so grades like Urals, Midland and African crudes will be a lot more attractive to Asian buyers,” said the trader with a North Asian refiner.

As March-loading trade slowly commences, the focus shifts to spot trades with traders expecting differentials resonating weakening fundamentals.

“December saw lofty premiums but that was because demand from India and China was good,” said another trader in Singapore. “This month expect most spot trading to be weak and discounted as India has high inventories and China is dealing with the virus again.”

With the release of Aramco's OSPs, the focus now shifts to the release of OSPs by other key producers including Abu Dhabi's ADNOC, Iraq's SOMO and Qatar Petroleum, which are expected later in the week.

"ADNOC and the rest will all follow Aramco. Expect them to raise OSPs too but ADNOC has been more aggressive through production and term allocation cuts so will be interesting to see what they come up with,” the second trader said.