Why Saudi Arabia has made its biggest oil price cut in decades

Saudi Arabia has reduced the price of its flagship crude sold to Asian buyers for August by the largest margin in at least 26 years. As a result of this, State-owned Saudi Aramco will lower the official selling price (OSP) of its benchmark Arab Light crude by $11 per barrel, leaving it at a $1.50 discount to the regional benchmark. The reduction happened because global crude prices have weakened since mid-June after the United States and Iran reached an agreement to end the war that started in February this year and disrupted the oil supply through the Strait of Hormuz. Brent crude has since fallen to about $72 a barrel, returning to levels last seen before the war. Additionally, exports resumed from the Persian Gulf, and Saudi Aramco increased shipments from Ras Tanura to roughly 90 per cent of pre-war levels. During the conflict, the company had rerouted much of its crude through its Yanbu terminal on the Red Sea after disruptions to traffic through the Strait of Hormuz.

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OPEC+ output increase adds to supply concerns

The latest price cut also follows OPEC+'s decision to approve another production quota increase for August. The alliance, led by Saudi Arabia and Russia, had announced only limited output hikes while the conflict was ongoing because several Gulf producers were unable to significantly raise exports due to disruptions in the Strait of Hormuz.

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Saudi price cut still leaves its crude at a premium

Despite announcing its steepest price reduction, reports suggest that it will not make any difference to Asian buyers as Saudi Arabia's flagship crude remains costlier than several competing Gulf grades. According to traders cited by Reuters, Saudi Arabia is not the only producer lowering prices. Other Gulf exporters have also offered deeper discounts. "The sharp month-on-month cuts to Saudi term OSPs came as little surprise, with competing Middle Eastern spot grades trading at even deeper discounts," Vortexa analyst Emma Li told Reuters. "Weak Asian demand, especially from China, together with the sanctions waiver on Iranian crude, has intensified competition among sellers and shifted the market in buyers' favour," Li added. The report also claimed that producers including the Abu Dhabi National Oil Co. (ADNOC), Iraq's SOMO, and Kuwait Petroleum Corp. are now offering their crude at substantial discounts in an effort to maintain demand as supply across the region recovers.