State oil giant Saudi Aramco will supply full crude contract volumes loading in May to several North Asian buyers despite its pledge to cut output by 500,000 barrels per day, several sources with knowledge of the matter said on Monday.
This comes after the Organization of the Petroleum Exporting Countries (OPEC) and allies, known as OPEC+, surprised markets last week by announcing an extra output cut of 1.16 million barrels per day (bpd) from May for the rest of the year.
Saudi Aramco’s monthly allocation was being keenly watched by investors as an indicator of whether planned output cuts could tighten supplies in Asia, the world’s biggest crude import market.
People are wondering whether the additional voluntary cut will actually affect supply, or whether it is designed just to shore up oil prices, said a source at an Asian refiner who declined to be named as he is not authorised to speak to media.
The OPEC+ announcement caused Brent and US West Texas Intermediate crude futures to jump 6% last week, returning to levels last seen in November.
Last week, Saudi Aramco also surprised the market by raising prices for the flagship Arab Light crude it sells to Asia for a third month in May.
It also increased the prices of other oil grades to Asian clients amid expectations of tighter market supply.
Asia’s oil demand had been expected to weaken in the second quarter as several refiners in Asia, namely Sinopec, South Korea’s third largest refiner and Aramco affiliate S-Oil Corp, Japan’s Fuji Oil and Idemitsu Kosan are shutting a combined 1.15 million bpd of crude distillation capacity in May.
Still, some investors are bullish about a recovery in China’s oil demand and expect global oil markets to tighten in the second half this year and push prices towards $100 a barrel.
Meanwhile, the Abu Dhabi National Oil Company (ADNOC), a state-owned oil giant from the United Arab Emirates, has informed at least three buyers in Asia that it will supply full contractual volumes of crude in June, trade sources said.
The UAE plans to cut 144,000 bpd from May as part of the OPEC+ cuts.
Oil rallied as much as 8.4% on Monday, the most in more than a year, after an unexpected decision by the Organization of Petroleum Exporting Countries and its allies to cut more than 1 million barrels in daily output starting next month. Saudi Arabia, the cartel's de facto leader along with Russia, agreed to slash production by 500,000 barrels a day.
The move blindsided the global crude market and prompted some banks to hike their price forecasts.
Traders and refiners had been eagerly awaiting the release of Saudi official prices since the start of this week on expectations of an OSP hike. Some buyers were also concerned about potential cuts in their cargo liftings from Aramco, or so-called allocations, prompting them to begin speaking with other non-OPEC+ suppliers for replacement or alternative supplies. Prices for US buyers also rose.
"These prices show that, despite the production cuts they announced, the Saudis still expect strong Asian demand," said Giovanni Staunovo, commodity analyst at UBS Group AG. "For the US, it may be possible that less supply will be flowing to the region with the higher prices."
Saudi Aramco can shape the overall amount of oil it exports in a given month through the setting of its official prices relative to those other competing suppliers. It can also do so via an allocation process where it decides how much of each grade it will supply to each customer. Allocations are typically known by the 10th of each month.
The producer also maintained prices for customers in northwest Europe and the Mediterranean.
Aramco sells about 60% of its crude shipments to Asia, most under long-term contracts, pricing for which is reviewed monthly. China, Japan, South Korea and India are the biggest buyers.
The company's pricing decisions are often followed by other Gulf producers such as Iraq and Kuwait.
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