Saudi Arabia slashes oil price $11 for Asia as supply glut deepens

Saudi Arabia cut its flagship crude price for Asian buyers by the most in over two decades, a move that reflects a market awash with supply after the US-Iran peace deal reopened the Strait of Hormuz.

Saudi Aramco lowered the August official selling price for Arab Light crude to Asia by $11 a barrel to a $1.50 discount against the Oman/Dubai benchmark, the steepest monthly reduction since at least 2000, as a surge in Gulf supply intensified competition for buyers.

"The scale of the cut caught the market off guard — traders had expected a premium of $1.50 to $3.00, not a discount," said a Singapore-based crude trader at a major Asian refiner, asking not to be named because the information is private.

The reduction reverses the previous month's $9.50 premium, which was exceptionally high by historical standards, and far exceeds the $8 decline forecast in a Bloomberg survey. Brent crude has slumped to around $72 a barrel from above $80 in mid-June, after the US and Iran reached an interim peace deal that allowed oil traffic to resume through the Strait of Hormuz. Saudi Arabia has restored crude shipments to roughly 90% of pre-war levels, while nearly 10 million barrels of trapped oil have been released into the market.

The price cut shows that the world's largest crude exporter is willing to sacrifice pricing power to defend market share as Asian refiners face a growing array of supply choices, including discounted Russian barrels. With OPEC+ having agreed to another modest quota increase for August, Gulf producers including Iraq and Kuwait may need to follow Saudi Arabia's lead to remain competitive, keeping pressure on crude prices through the third quarter.

The last two times Saudi Arabia sold crude at a discount to the regional benchmark were during price wars in 2020 and 2015, both periods of acute oversupply. The current move, while less aggressive than those episodes, reflects a similar dynamic: supply is outpacing demand, and producers are competing for buyers.

Asian Refiners Gain Leverage

For India, China, Japan and South Korea — the largest Asian buyers of Saudi crude — the lower term price improves refinery economics at a time when spot differentials for Middle Eastern grades have weakened. Indian refiners, which have increased purchases of discounted Russian crude over the past year, now have additional bargaining power in negotiations with Gulf suppliers. The August Arab Light price at a $1.50 discount to the Oman/Dubai average is the lowest since June 2020, according to pricing documents reviewed by Reuters.

The shift also pressures other Gulf producers. Kuwait, Iraq and the United Arab Emirates often calibrate their monthly official selling prices against Saudi Arabia's. A cut of this magnitude raises the risk of a competitive race to the bottom, particularly if Asian refinery demand fails to absorb the additional barrels flowing through the Strait of Hormuz.

Market Pricing Reflects Softer Outlook

Prediction markets have already adjusted to the new supply reality. The probability of crude oil reaching a new all-time high by Sept. 30 has fallen to 2.6% from 10% a week earlier, while the year-end probability dropped to 7.5% from 16%, according to data from major forecasting platforms. Brent crude's decline below $80 a barrel — a level that had held as a psychological floor during the conflict — suggests traders are pricing in sustained surplus rather than a temporary dip.

The next key data point will be the EIA's weekly inventory report, which will show whether the additional supply is being absorbed by US refiners. OPEC's monthly market report, due later this month, will provide updated demand forecasts that could either justify the price cuts or deepen them if consumption weakens further.

This article is for informational purposes only and does not constitute investment advice.