Saudi Arabia sharply raised the price of its key oil sold to Asian buyers to a record premium as escalating tensions in the Middle East and concerns about Iran potentially restricting the Strait of Hormuz roil global energy markets.
State-owned Saudi Aramco raised the price of its flagship Arab Light next month to a $19.50 premium over regional benchmarks for Asian refiners, according to a price list published by Bloomberg.
But that increase was still only about half of what analysts had expected in a Bloomberg survey. Traders noted that pricing was particularly difficult this month due to extreme volatility in oil benchmarks in the Middle East during the conflict, along with a drop in prices late in the month.
Benchmarks such as Dubai and Omani crude, which Saudi Arabia uses to set its prices, have shown increased volatility, in part because the conflict has reduced the availability of crude types used to determine regional prices. Some Asian refiners have proposed alternative pricing methods, including switching to global benchmark Brent.
The impact of the Middle East conflict on global oil flows
Now in its sixth week, the conflict has disrupted global oil flows, with the crucial Strait of Hormuz largely closed and severing a major route used to transport millions of barrels of oil from Saudi Arabia and other major Gulf exporters. In response, Saudi Arabia diverted most of its shipments to the Red Sea port of Yanbu, located about 1,200 kilometers from its usual export hub at Ras Tanura on the Gulf Coast.
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Despite this shift, Saudi Aramco continued to base its official prices on oil loaded at Ras Tanura, complicating costs for buyers. The company instructed customers to place separate orders specifying how much crude they wanted to ship from each port, noting that only the Arab Light class would be available for loading from Yanbu.
The ongoing conflict and the closure of the Strait of Hormuz have boosted Brent crude oil prices by more than 50%. In response, Saudi Aramco raised the price of its Arab Light oil by $17 a barrel in May, the largest increase ever recorded.
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It has also applied the same price increase to all of its other crudes sold to Asia, although some of these are currently unavailable due to the closure of Hormuz. Prices for shipments to regions such as the United States and northwestern Europe were also increased to record high premiums.
Among Gulf producers, only Saudi Arabia and the United Arab Emirates have meaningful alternative export routes that bypass the Strait of Hormuz. Aramco now runs its Red Sea pipeline at full capacity of 7 million barrels a day and exports nearly 5 million barrels a day from there, about 70% of its pre-war export levels.
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Saudi Arabia sends most of its oil to Asian markets, making the region its largest customer base. Key buyers include China, India, Japan and South Korea, which rely heavily on Middle Eastern oil to meet their energy needs, according to The Sunday Guardian.
These countries have large refining sectors and are dependent on a steady supply of oil for energy, transport systems and electricity generation. As a result, any disruption to Gulf exports has a direct impact on their economies, making them highly sensitive to fluctuations in oil prices. Although Saudi Arabia also supplies oil to Europe and the United States, Asia remains the primary destination for its exports.
Meanwhile, Aramco has largely halted production of its medium and heavy crudes, focusing instead on light and extra light oil supplies from Yanbu, CEO Amin Nasser confirmed during a March 10 conference call.
