Saudi Arabia cuts July OSPs 2nd month as Asia demand falters

Saudi Arabia's second monthly price cut to Asia signals demand weakness is outweighing the biggest oil supply disruption in history.

Saudi Arabia cut crude prices for Asian buyers for a second month, signaling that weakening demand — led by China's import slump — is overwhelming the loss of more than 10 million barrels a day of Middle Eastern supply through the Strait of Hormuz.

"China's backing off from the crude market has played a crucial role in attempting to rebalance the global market, which has helped cap oil prices," Warren Patterson, head of commodities strategy at ING Groep NV in Singapore, said. "The extent of which has taken most of the market by surprise."

The July Official Selling Price reduction follows a similar cut for June, as spot premiums eased across Asia. Brent crude traded near $96 a barrel Monday, well below the $140 spike seen after the US launched strikes on Iran in late February and far from the $200 levels some analysts had initially forecast. China, the world's largest crude importer, slashed inbound shipments by almost 40% in May from last year's average, according to Vortexa Ltd.

The price cuts underscore a fragile equilibrium in global oil markets. While weaker Chinese buying and record US exports have kept a lid on prices, global inventories are drawing down by 70 million to 80 million barrels a week, according to Greg Sharenow, who helps manage nearly $24 billion as head of Pacific Investment Management Co.'s commodity portfolio investment team. US oil inventories have fallen to the lowest level in more than two decades, leaving the system increasingly vulnerable to any fresh disruption.

Demand Weakness vs. Supply Risk

The OSP reduction reflects a market where demand-side factors are temporarily dominating. China's refinery throughput in May and June is estimated at around 13 million barrels a day, according to Kpler and Energy Aspects Ltd., compared with an average of 14.8 million barrels a day last year — a run rate last seen during the early stages of the pandemic in 2020. The slowdown stems from multiple factors: China has stopped adding aggressively to its strategic crude stockpile, shifted toward coal-based feedstock for chemicals, and seen booming electric-vehicle sales curb gasoline consumption.

At the same time, the US has emerged as the world's most important swing supplier. American crude and fuel exports in May were more than 2 million barrels a day higher than last year's average, helping fill part of the gap left by disrupted West Asian supplies. The Trump administration pledged to release 172 million barrels from the Strategic Petroleum Reserve, releasing barrels at a rate of as much as 1.4 million barrels a day in one week last month.

India's Russian Crude Cushion

For India, the world's third-largest crude importer, the price relief has been amplified by a US waiver on some sanctioned Russian oil. Russian crude flows to India averaged about 1.76 million barrels a day in May, 63% higher than in February, according to Bloomberg. That has helped Indian refiners offset the loss of Middle Eastern barrels, though the arrangement depends on policy waivers, shipping availability and payment channels that are not guaranteed to persist.

The relief for import-dependent economies may prove temporary. The last time Saudi Arabia cut OSPs for two consecutive months was during the 2020 demand collapse, when Brent briefly traded below $20 a barrel. The current context is fundamentally different: supply buffers are thinning rapidly, and if Chinese demand returns to pre-war purchasing levels while Hormuz remains disrupted, oil prices could move sharply higher.

For now, the market is being held together by weaker Chinese demand, higher US exports, emergency reserves, Russian crude flows and alternate Gulf routes. As analysts at Bloomberg have noted, these are cushions, not permanent fixes. The question is how long they can hold.

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