First “discount price” since 2020! Saudi Arabia “slashes oil prices,” cutting $11 in one go

Saudi Arabia has announced its largest official crude oil export price cut in more than 26 years, marking a profound shift in the global oil market supply landscape.

According to Reuters, Saudi state oil company Aramco issued a pricing statement on Monday, setting the official selling price (OSP) for its flagship Arab Light crude oil for August deliveries to Asia at a discount of $1.50 per barrel to the Oman/Dubai average, a sharp reduction of $11 from the previous month.

Reuters data going back to 2003 shows this is the largest cut on record, and the August OSP is also the lowest since June 2020. This is the first time Saudi Arabia has sold crude at a discount since the 2020 price war.

The price cut far exceeded market expectations. A Reuters survey in late June had predicted an OSP premium range of around $1.50 to $3.00 per barrel for August, but the final result not only showed no premium but flipped to a discount, significantly exceeding expectations. Meanwhile, OPEC+ announced on Sunday that it would further increase production targets starting in August, and with the gradual resumption of oil exports through the Strait of Hormuz, global supply pressure continues to intensify, putting clear downward pressure on oil prices.

Largest cut in over two decades, Asian buyers the core target

The core target of this price cut is the Asian market, especially China and India, the world's two largest crude oil importers. Saudi Aramco slashed its August OSP for Asia from a premium of $9.50 per barrel last month to a discount of $1.50 per barrel, a single-month change of $11, the largest single adjustment since 2003.

Oil market analyst Ahmed Mehdi said the official price cut "reflects supply overhang for near-term cargoes" and noted that this is not a signal of a price war but rather the result of "normalization of the Strait of Hormuz chaos." He added, "Pricing needs to be competitive enough to rekindle buyer interest."

Notably, Saudi Arabia also made significant cuts to pricing for other regions. The OSP for Arab Light crude destined for Northwest Europe was set at a premium of $0.85 per barrel to ICE Brent, down $15 from the previous month; the price for North American customers was set at a premium of $4.60 per barrel to ASCI, down $8 from July.

Strait of Hormuz reopening combined with OPEC+ production hikes, supply flood weighs on oil prices

The direct backdrop for this round of price cuts is the reopening of the Strait of Hormuz. Up to 12 million barrels of crude oil pass through the strait daily. With the strait back in operation, Gulf oil producers have accelerated production increases, significantly boosting global supply and further depressing oil prices.

Against this backdrop, Brent crude oil prices have fallen about 22% since early June. WTI near-month futures have been trading in a narrow range around $68 to $69 per barrel. Meanwhile, Russian Urals crude oil prices fell to around $40 per barrel in early July. Analysts point out that OPEC+'s continued production increases amid weak global demand could lead to a supply surplus and trigger further downward price pressure.

Ripple effect: Other Middle Eastern producers may be forced to follow

The scale of Saudi Arabia's massive price cut has sparked widespread concern about whether other Middle Eastern oil producers will be forced to take similar actions. In an increasingly competitive environment to attract buyers, official pricing from other regional producers is expected to be announced in the coming days, and the market will closely monitor the extent to which they follow suit.

Currently, Brent crude spot prices remain below pre-war levels, and the market is in a deep contango structure, reflecting clear expectations of near-term supply oversupply. Analysts believe that under the dual pressure of the Strait of Hormuz flow not yet fully returning to historical normal levels and the continued advancement of OPEC+ production increase plans, oil prices are unlikely to find effective support in the short term.

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