WEEKLY ENERGY RECAP: Oil prices ignore worsening trade feud

A further tightening in the oil market added to supply concerns and offset the impact of trade tensions between the US and China. (File/Reuters)

• The surge in Chinese crude imports also coincided with tumbling Iranian oil exports

RIYADH: Oil prices were flat on the week despite some volatility. Brent and WTI crude eased to $70.62 and $61.66 per barrel, respectively.
The downward deterioration in crude prices came, counter-intuitively, despite the escalation in the US-China trade war.
Further tightening in the market added to already heightened supply concerns and offset the impact of trade tensions. Still, the broad narrative of continuing trade uncertainty should support prices.
The feud between the world’s two economic superpowers should be seen in the context of rising global demand with China’s (the largest oil importer) crude oil imports reaching a record
10.68 million barrels per days (bpd) in April.
Some saw the spike as a result of Beijing importing more as a hedge against US sanctions exemptions expiring, but that argument doesn’t really stand up to scrutiny because the April crude oil imports were loaded a month ahead in March. Indeed, at this point Beijing was hopeful of an extension of US waivers.
China’s previous crude import record high was 10.48 million bpd in November 2018 and the country’s crude imports were hovering above 10 million bpd for four months until March, when the volume fell to 9.3 million bpd.
The surge of China crude oil imports in April came despite an estimated 1.7 million bpd of refining capacity that was taken offline for the peak maintenance season.
This surge in Chinese crude oil imports also coincided with tumbling Iranian oil exports.
Prices should have been supported further by tighter supply amid continuing production cuts by OPEC and US sanctions on Iran and Venezuela. 
OPEC April output was 30.26 million bpd, with Saudi Arabia output at a 15-month low of
9.8 million bpd, and Iranian output lower than during the 2012 sanctions at 2.57 million bpd in April.
Global refinery margins are still supported by strong gasoline demand that will cause additional draw downs in inventories in the coming weeks as driving season approaches. 
This has caused an increase in official selling prices (OSP) for lighter crude oil grades from Saudi Arabia for June cargoes, driven by robust refining margins for light-end products.
The suggestion that Asian refiners are being forced to pay more for Saudi crude as they scramble for replacement barrels to make up for a supply shortfall from Iran may not be accurate.
Saudi Aramco monthly OSP calculations are consistent and consider the refining margin changes. Also the widening Brent/Dubai spread favored Dubai-linked Arabian Gulf crudes over Brent-linked crudes.
Hence the increases in Saudi Aramco June OSP prices for the lighter grades came amid an upswing in gasoline margins.
This refers to the physical price of crude oil loading in the Arabian Gulf through the month of assessment. 
Saudi Aramco’s monthly OSP is based on a sophisticated pricing formula. This considers a number of different factors, including month-to-month changes in refining margins, benchmark market structure movement, related crudes’ competitiveness and a timing mechanism that stipulates when the value of the formula is to be calculated. 
Saudi Aramco sells all of its crude on long-term contractual agreements. This is how it can best fulfill contractual commitments to all of its customers and ensure supply reliability through proper allocation of crude production.