Saudi Aramco may have shot itself in the foot by unexpectedly increasing the price of its crude oil to Asia, with a major Chinese refiner responding by sharply cutting back on the volume of cargoes from the world's top exporter.
Sinopec, Asia's largest refiner, aims to slash its crude oil imports
from Saudi Arabia's state producer by 40 percent in May, according to an official from the company's trading arm Unipec.
Such a large cut sends two very clear messages to Aramco, the first being that Sinopec didn't agree with the price hike, and the second that the Chinese refiner feels it can make up any shortfall from other suppliers.
It's an almost unprecedented response by a significant buyer of Saudi crude, and it underlines the extent to which the market was caught by surprise by Aramco's decision to increase the official selling prices (OSPs) for May-loading cargoes.
And it's not just Sinopec that is sending a message, with trading sources at two North Asian refiners saying they also plan to reduce volumes from Saudi Arabia by 10 percent in May.
Aramco boosted the OSP for its benchmark Arab Light grade for Asian customers for May cargoes to a premium of $1.20 a barrel over the average of quotes for regional grades Oman and Dubai, up 10 cents from the prior month.
The market had been expecting a cut of between 50 and 60 cents a barrel, based on movements in the price curve between front- and third-month cash Dubai prices.
Unlike Brent and West Texas Intermediate, the two largest global crude benchmarks, the Dubai market is in contango, where prices for later-dated cargoes are higher than those for immediate delivery.
This suggested to the market that Aramco would lower their OSP, as the company usually sets its OSPs in line with changes in the pricing structure for Dubai crude.
Aramco doesn't disclose reasons for changes in its pricing, leaving the market somewhat nonplussed at the action.
The most plausible explanation for the deviation from previous practice is that Aramco is doing its best to keep oil prices high ahead of its planned initial public offering (IPO).
The listing, which is slated for later this year but is probably more likely in 2019, needs a strong oil price to be successful, with a figure above $70 a barrel seen as a minimum.
Brent crude is currently around $67 a barrel, meaning the Saudis have to continue to do everything possible to keep the price biased higher.
Up to now the main vehicle for boosting prices has been the deal to cut output, struck by the Organization of the Petroleum Exporting Countries (OPEC) and allied producers, including Russia.
The surprise increase in the OSP for its major customers in Asia may be another tactic aimed at keeping oil prices strong.
But as the Sinopec reaction shows, Aramco may end up with the worst of possible outcomes.
MARKET SHARE SLIPPING
It's likely to continue to surrender market share to rivals in China, and if Sinopec has no difficulty obtaining alternative supplies it undermines any narrative that oil markets are tight and prices should rise further.
Saudi Arabia used to be China's largest supplier of crude oil, but has lost that spot to Russia in the past two years.
Chinese customs data showed imports from Saudi Arabia rose only 2.3 percent on 2017 from the previous year, below the overall increase of 10.2 percent.
Imports from Russia jumped 13.8 percent, and those from third-ranked supplier Angola by 15.3 percent.
Detailed figures for 2018 are only available for the first two months of the year, but these show China's imports from Saudi Arabia down by 8.9 percent, while those from Russia surged 20.7 percent and those from Angola rose by 2.6 percent.
If Angola continues
to gain market share in China, it may well overtake Saudi Arabia to take second spot behind Russia this year, a possibility that surely should concern Aramco's executives and their political masters.
It appears as if the Saudis are increasingly putting themselves between a rock and a hard place.
They need to keep the crude price high to boost the IPO, but face the loss of market share in Asia and potential damage to relations with long-term customers.
By Clyde Russell