Crude Futures Higher After Aramco Raises OSP, USD Retreats

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Aside from the RBOB contract, which reversed lower from a fresh record high, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange advanced in early trade Monday, lifting the U.S. crude benchmark towards $121 barrel (bbl) amid a one-two punch of a weakening U.S. dollar and larger-than-expected price hike for Asian and European refiners from Saudi Aramco -- a move by the world's largest oil producer that signals strong demand growth this summer as China reopens from a protracted lockdown.

Saudi state-owned oil producer Saudi Aramco said it would raise official selling prices of Arab light crude for Asian customers by $2.10 bbl in July compared with market expectations for a $1.50 bbl increase. These changes mean Asian consumers will pay a $6.50 bbl premium for Aramco's crude oil over the average of the Oman and Dubai benchmarks. The price hike clearly signals expectations for a strong demand recovery in Asia after China, the region's largest economy, eased draconian COVID controls in Shanghai and Beijing. Out of China's largest 50 cities by economic size, none currently have widespread restrictions in place, according to Bloomberg's data, with mobility rapidly recovering from a near standstill seen in early May.

Saudi Aramco also raised its prices for European and Mediterranean buyers, raising OSPs by $2.20 bbl and $2 bbl, respectively. In northern Europe and the Mediterranean, refiners will now pay a $4.30 and $3.90 premium bbl compared with the ICE Brent oil benchmark. Interestingly, Aramco left OSPs for U.S. refiners unchanged at premiums in the range of $7 bbl and $4.50 bbl.

Recent manufacturing and jobs data in the United States suggest the economy was still growing at a rapid pace this spring, with May's employment report showing a larger-than-expected 390,000 increase in employment and small moderation in monthly wage gains. Data from the Institute of Supply Management released last week show a faster-than-expected pace for manufacturing activity in May.

The price hike comes despite OPEC+ agreeing on June 2 to raise oil production by 648,000 barrels per day (bpd) for July and August, some 200,000 bpd larger than the increases seen in recent months. Still, doubts persist that the group will fully deliver on the pledged increases, given that many members have struggled to raise output in line with monthly quotas. A Reuters survey found output undershot pledged output hikes in every month between October 2021 and April except for February. According to Citi Group, the decision by OPEC+ could in fact mean 132,000 bpd of additional crude from Saudi Arabia, United Arab Emirates, Kuwait, and Iraq. The production increase, however, would do little to cover for structural supply shortfall on the global market amid steep loses of Russian output and supply disruptions in several OPEC producer nations, including Libya, Nigeria, and Angola.

Near 7:15 a.m. EDT, NYMEX West Texas Intermediate for July delivery advanced $0.55 to $119.49 bbl, with the international crude benchmark Brent contract for August gaining $0.57 to $120.32 bbl. NYMEX RBOB July contract declined 1.39 cents to $4.2522 gallon and ULSD July futures gained 3.10 cents to $4.3119 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges