Russell: Saudi Arabia's Oil Price Hike To Asia May Be Self-Harming

(The opinions expressed here are those of the author, a columnist for Reuters.)

LAUNCESTON, Australia, June 5 (Reuters) - Saudi Arabia's dilemma is shown quite neatly by its decision to raise crude oil prices for Asian refiners even though the kingdom is steadily surrendering market share in China, its biggest customer.

Saudi Aramco, the state-owned oil company, lifted the official selling price (OSP) for its benchmark Arab Light grade to Asian refiners by 60 cents a barrel for July shipments, according to a statement released on Sunday.

Arab Light cargoes for July will now be sold at a discount of 25 cents a barrel to the Oman-Dubai crude price, up from a discount of 85 cents for June shipments.

The increase in the OSP had been expected by the market, although it was by a wider margin than forecast in a Reuters survey of six Asian refiners and traders, with the increase of 60 cents beating even the top estimate of 50 cents in the poll.

Saudi Aramco sets the OSP based on recommendations from customers and after calculating the change in the value of its oil over the past month, based on yields and product prices.

It also takes into account the market structure, and some narrowing of the Oman-Dubai contango at times in May from April was also a pointer to an increase in the price.

A contango market refers to prompt prices that are lower than those in future months, while a narrowing contango signals increased demand or tightening supply.

The difference between front-month Dubai crude and third-month stood at 54 cents a barrel on June 2, which is down from 62 cents on May 29 but is actually wider than the 44 cents that prevailed on the last trading day in April.

What this means is that part of the Saudi price hike for July was attributable to technical factors and was an expected response.

But it's worth noting that the change in the contango is actually very small, and certainly not enough to justify a larger-than-expected increase in the OSP for July.

A further sign that the hike for July was higher than expected is shown by the relative lack of movement in the premium of Brent crude to Dubai, known as the exchange for swaps <DUB-EFS-1M>.

Over time the Saudi OSP tends to track the premium quite closely, but in recent months the Saudis have kept the OSP in a fairly narrow range while the Brent-Dubai spread has narrowed considerably, from $2.07 a barrel in December to just 65 cents by June 2.

Normally this would result in the Saudis lowering the OSPs, and while they did do this for May and June cargoes, the increase for July reverses the earlier price cuts.