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Sharp cuts in Saudi OSPs – A warning that further unilateral cuts are unlikely


Last week, Brent crude experienced a notable gain of USD 1.7/b, concluding Friday at USD 78.8/b, propelled by escalating risks in the Middle East. However, this morning, we are witnessing a 1% retreat in Brent prices to USD 78/b, attributed in part to a broader market weakness in industrial metals and equities.

Bjarne Schieldrop, Chief analyst commodities, SEB

Adding to the current bearish sentiment is a significant reduction of USD 2/b in Saudi Arabia’s Official Selling Prices (OSPs) to Asia. This move is particularly impactful as it places the average OSPs below the 10-year average for Super light and Extra light, indicating a weakness in the light-end spectrum of crudes. This adjustment may signal demand softness in this segment, although it is more likely a reflection of robust growth in the supply of light sweet crudes, notably shale oil, from the United States.

This reduction mirrors the sharp decline observed in early 2020 when Saudi Arabia slashed its OSPs by USD 2/b from February to March. The strategic intent behind this move appears to be Saudi Arabia’s commitment to ensuring the sale of its entire 9 million barrels per day (b/d) production, a quantity it has voluntarily committed to. Lowering its OSPs is a signal that Saudi Arabia aims to remain competitive in the market and is unwilling to unilaterally reduce its volume below the 9 million b/d mark.

This is probably not a signal that Saudi Arabia is suddenly shifting strategy from ’price’ to ’volume’. But it could be taken as a warning that Saudi Arabia won’t go the road alone indefinitely. If further cuts are needed by OPEC+ to maintain the oil price around USD 80-90/b and OPEC+ as an organization resist backing the needed cuts, then further unilateral cuts by Saudi is far from given.

The upcoming release of the U.S. Jan Short-Term Energy Outlook (STEO) report on January 9 will be studied closely. Of particular interest is whether there will be a revision in the outlook for U.S. shale oil production in 2024. The December report projected virtually zero growth from December 2023 to December 2024, following a robust year of 2 million b/d growth in hydrocarbon liquids from December 2022 to December 2023. The market will closely scrutinize the report to assess whether the EIA still expects U.S. liquids production to plateau in 2024 or whether it will continue its robust growth by 1-2 million b/d on a Dec-to-Dec basis.

US shale production growth in 2024 will be key in shaping the decisions of OPEC+, influencing whether their strategy will be on price or volume. US shale oil production growth in 2024 will likely have a significant impact on the trajectory of oil prices in the coming year.

Saudi Arabia’s Official Selling Prices (OSPs) to Asia was reduced by USD 2/b for February.

Source: SEB graph, Blbrg data

Saudi OSPs for all grades were reduced by USD 2/b

Source: SEB graph, Blbrg data

Saudi Arabia’s OSPs are now below the 10yr average for Super light and Extra light while still above for the lighter grades.

Source: SEB graph, Blbrg data

Average Saudi OSPs to Asia now at lowest level since April 2021 and the MoM change is the biggest since October 2022

Source: SEB graph and calculations, Blbrg data

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