Geopolitical conflicts shake the anchor point of crude oil pricing: Saudi crude oil premiums may soar to $40, Asian refineries face "sky-high" procurement decisions.

The Iran war has thrown the traditional pricing mechanism for Saudi Arabian crude oil into disarray. With oil prices soaring, anxious Asian buyers are trying to steer Saudi Arabia towards alternative supply mechanisms. State-owned oil producer Saudi Aramco is finalizing the selling price for May shipment of crude oil, with the price list expected to be delivered to buyers in a few days. According to traders, based on the regional benchmark conventional pricing mechanism, the premium for its flagship product Arab light crude oil is expected to soar to an unprecedented level of about $40 per barrel. In comparison, the premium in April was only $2.5. The process of setting official selling prices usually involves informal consultations with refineries for Aramco to assess the market conditions, but it is unclear how much influence this will have on the final pricing. As Asian buyers are facing anxiety over limited supply and high prices squeezing profit margins, the urgency of these consultations has significantly increased. Aramco's monthly contract prices are usually set as differentials from the underlying benchmark, which is composed of the Dubai price from S&P Global Energy Assessments and the Oman crude oil futures from the Gulf Commodity Exchange. Traders have said that some spot market transactions - usually priced based on the Dubai benchmark - have been completed with alternative solutions including financial instruments linked to Brent. Traders have stated that some Asian refineries have requested Aramco to link their crude oil to Brent futures, but other alternative solutions have also been proposed. This includes using the Shanghai Futures Exchange's crude oil prices minus shipping and other related costs, or even referencing other crude oil varieties such as the UAE's Upper Zakum. It is known that S&P Global Energy has started daily publication of the prices of this grade of crude oil this month. Refinery traders importing conventional crude oil from Saudi Arabia have stated that negotiations between Aramco and customers are still ongoing with the final pricing decision yet to be made. They added that if the premium is ultimately set at around $40 per barrel, it is likely to lead to a reduction in purchases. Aramco has declined to comment on this. According to market compilation data since 2000, the highest premium level Aramco previously charged for Arab light crude oil exported to Asia was $9.80 per barrel in August 2022. The pricing of other grades of crude oil under Aramco, such as Arab Extra Light, Arab Medium, and Arab Heavy, face greater obstacles. Traders have stated that due to the actual closure of the Strait of Hormuz, the transportation of these grades of crude oil has almost come to a complete stop. The Yanbu pipeline from the eastern to the western ports in Saudi Arabia for exporting crude oil can only transport Arab Light crude oil. However, alternative Yanbu pipeline routes cannot fully compensate for the losses caused by the closure of the Strait of Hormuz. Saudi Arabia's crude oil sales to its two largest Asian buyers, China and India, are expected to be lower than usual levels in April.