Oil Surges After Saudis Slash Price Discounts In Bid To Prop Up Market

After slumping much of yesterday, Brent soared on Thursday morning, after Saudi Arabia stepped in to prop up the recovery in the energy market by raising crude prices for its customers worldwide. Saudi Aramco increased pricing for most of its grades for shipment in June.

According to a price list seen by Bloomberg, 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 increasing pricing for Asia, Aramco is also indicating it sees demand beginning to recover in its largest regional market. The company is reversing three consecutive months of reductions in pricing for the world’s largest oil-consuming region.

Saudi Arabia - which at the start of March launch an unprecedented price war that crashed the market - is now telegraphing that it will "do whatever it takes" to support an oil price recovery. The kingdom narrowed discounts most notably for 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.

The price hike takes place as the world’s biggest exporter is also cutting production as part of a global pact aimed at tightening supply and buttressing prices. Brent gained as much as 7%, rising by more than $2/barrel, and was last trading at $31.60.

As a reminder, Saudi Arabia began paring production late last month, after the Organization of Petroleum Exporting Countries and its partners, including Russia, agreed to slash output by 9.7 million barrels a day starting May 1. Oil prices have plunged this year and many drillers may stop pumping at wells that are no longer profitable.

As Bloomberg notes, 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. Of course, it also means that US shale producers will sense a shift in the tide and aggressively pursue maximum output which, ironically, may lead to another glut if demand does not rebound as fast.