Saudi Arabia has just announced the discounts or premiums to benchmark crudes that will set the prices its customers will pay for August deliveries. In almost all cases, the effect is to increase the comparative price of Saudi crude MoM. The average increase is especially noticeable in prices to Europe and to Asia, which increased USD 0.85/bbl and USD 0.66/bbl, respectively.
The relative price of Saudi crude to its customers has been increasing for three-four months now and while current differentials are not out of line with historical values, making its crude more expensive could indicate an intention by Saudi Arabia to cut supply by reducing customer demand, we believe. While it cannot be regarded as a trend yet, in our view, it is notable that Saudi crude production fell slightly in May MoM and preliminary data indicate that it might have eased back again in June. Since pricing parameters preceded crude deliveries, the increase in comparative price is unlikely to have had time to impact customer demand fully.
It remains our view that, for the oil market to be brought back into better balance from its current over-supplied position, it is likely that Saudi Arabia will have to cut production at some point this year since we expect the new Iran sanctions to have a limited effect as compared to consensus.
We doubt that the modest reduction in Saudi supply to date will be sufficient in scale, but pricing policy might prove a good indicator that Saudi Arabia is taking subtle steps to defend its stated USD 100/bbl price mark, as we expect it to do.