Over the course of 2014, changes in Saudi Arabia’s official selling prices (OSP) for its crude oil has gathered increasing market interest. Adjustments in the OSP affect the relative attractiveness of long term Saudi exports contracts in relation to other crude oil grades, according to Deutsche Bank.

This will, in turn, affect refiners across the various regions and their purchasing decisions relative to other alternatives on the spot market.

In general, these pricing changes are meant to ensure a steady uptake of Saudi Arabia’s crude sales, rather than as a direct effort to undermine the market position of competing suppliers.

Changes in OSPs may be initiated in response to excessively high or low crude oil demand in a particular region, or to implement production quota changes, as in the case of 2009, Deutsche Bank said.

Over the second half of this year, Saudi Aramco has implemented OSP drops in both Asia and the US in response to lower demand for its exports, pushing the volume-weighted average OSP to a discount for the first time since 2010.

This makes sense given the weakest US demand for Saudi oil since 2009, seasonally weak Saudi consumption for power generation, and an as-yet unchanged OPEC production quota.

In Asia, however, the picture for oil demand appears relatively positive as refinery margins have recovered substantially since the lows of July and August. Additionally, the Asian import arbs for Forties (NWE) and Bonny (Nigeria) are closed, meaning that comparative demand for Middle Eastern crude should be high going forward. This may explain the rise in the Saudi OSP for Asia from November to December.
Source: Deutsche Bank