Saudi Arabia Moves to Prop Up Oil Market by Raising Prices

(Bloomberg) -- Saudi Arabia moved to prop up a nascent recovery in energy markets by raising crude prices for its customers worldwide, triggering a rally in oil futures.

State-owned Saudi Aramco increased pricing for most of its grades for shipment in June, according to a list seen by Bloomberg. The world’s biggest exporter is simultaneously cutting production as part of a global pact aimed at tightening supply and buttressing prices. Brent crude gained as much as 7%.

Saudi Arabia -- which started a merciless price war in March that crashed the market -- is now indicating it’s determined to do whatever it takes to support an oil price recovery.

“The Saudis are sending a signal to the market that they want to sell oil, but right now they don’t want to compete for market share,” said Ole Hansen, head of commodity strategy at Saxo Bank. “A higher price would lessen the economic cost of cutting production.”

The coronavirus has demolished global energy demand, forcing economies to shut down and workers to stay at home. Benchmark Brent crude has plunged by more than half this year, and with their economic and political stability in the balance, the world’s biggest producers agreed last month to make unprecedented cuts in output to counter a supply glut.

The Organization of Petroleum Exporting Countries and its partners, including Russia, officially started paring production on May 1. Amid signs that demand may slowly be returning, crude has rallied over the past two weeks.

Output Cuts

Saudi Arabia began reducing output in late April, from record levels of more than 12 million barrels a day, and is targeting 8.5 million barrels of daily production in May and June. Like other OPEC+ producers, it plans to taper the curbs into 2022.

The kingdom narrowed June pricing discounts most notably for shipments to Europe and the Mediterranean, the main market for Russian crude. That appears to be a signal to the Kremlin after Riyadh and Moscow agreed last month to work together again through the OPEC+ alliance and bring the price war to an end.

Raising prices to the U.S. will make Saudi barrels less attractive in a market where the main crude benchmark went negative last month. Selling less in the U.S. may also help appease President Donald Trump, who helped orchestrate last month’s historic production-cutting agreement and who has threatened tariffs against Saudi crude imports. Trump is keen on protecting U.S. jobs in the oil industry in an election year.

Aramco raised its official selling price for flagship Arab Light crude to buyers in Asia by $1.40 a barrel, to a discount of $5.90 below the Middle East benchmark. The company was expected to reduce its official pricing by $2.50 a barrel, to a discount of $9.80, according to the median estimates in a Bloomberg survey of seven traders and refiners.

By reversing three consecutive months in which Aramco cut pricing to Asia, the company is indicating it sees demand beginning to recover in its largest regional market. Aramco made its smallest pricing increases for buyers in Asia, a sign that it intends to ship most of its exports to buyers there.

©2020 Bloomberg L.P.