by Miceál O’Hurley
RIYADH — Last week, State-owned Aramco increased its signature Arab Light Oil selling price for November to the Asian market at 90-cents, month-on-month. Asian markets were relying on the Bloomberg forecast of a more moderate 65-cent rise in the base price. Singapore markets have been reporting depressed refining operations for the last month due to yields remaining far below seasonal average. Asian refineries report refining profitability at its lowest level since 2020. LSEG data indicates complex refining margins in Singapore, the regional benchmark, fell to only $1.62 a barrel for the first week in September. This fall places the average down a startling 68% from the same period in August. With only marginal profitability, Asian oil refiners are complaining that Aramco and the Kingdom is profiteering from price hikes in excess of those necessary to offset current risks to Iranian supply, notwithstanding the expanding regional conflict environment.
Oil markets remain unsteady due to the regional spillover from the Israeli-Gaza war.
Most analysts have already resolved that Israel’s military operations over the border into Lebanon in pursuit of Hezbollah marks the commencement of the Third Israeli-Lebanese War. Last week, an Israeli strike in Lebanon is confirmed to have killed Hezbollah’s leader, Hassan Nasrallah. Iranian military officials were also reported to have been killed in that strike. A subsequent strike reportedly killed Hashem Safieddine who is claimed to have replaced Nasrallah. Iran responded with their largest-ever missile strikes upon Israel. Tehran launched over 200 ballistic missiles in its second such attack on Israel this year.
Ballistic missiles are rocket-propelled, super-sonic projectiles which rely on a powered boost phase before following an arc at, or above, the upper atmosphere which guides them to their targets in descent. By contrast, conventional cruise missiles rely on continuous jet-powered flight and are generally constrained to sub-sonic speed. According to Israel, its vaunted “iron dome” defense system eliminated the bulk of the 200 ballistic missiles thereby minimising damage. The country remains on tenterhooks with Israeli Prime Minister Benjamin Netanyahu threatening to strike Iran’s nuclear facilities in retaliation.
With elevated tensions in the Middle East, Asian refiners have suffered from higher-than-desired base costs for refining Arab Light Oil. The latest, precipitous base price rise of 90-cents, month-on-month, will further cut into their profitability for the third straight quarter. Asian refiners processed some 1.7 million barrels a day during August. Their operations are key to maintaining global supply and price stability.
At such pricing levels, any disruption or even a slow-down of Iranian production could further damage the refining market. Prices may edge even higher, still. Saudia Arabia’s signaling that it is willing and capable of absorbing any drop in production by Iran may bode well for their market share. It further somewhat ameliorates unreasoned fears of a world-wide production shortage and any corresponding steep price-hike.
Still, Saudi Arabia’s price hike has collateral consequences. Two of Saudi Arabia’s most consequential oil partners are countries that the Kingdom has been at pains to nurture greater economic cooperation after joining BRICS in January 2024 – Russia and China.
Moscow directly and significantly benefits from increased oil prices ushered in by Riyadh. Russia, whom U.S. Senator John McCain once described as, “A gas station masquerading as a country,” has increasingly relied on oil revenues at a time when international sanction regimes are punishing its economy. The continued flow of that revenue, and any increase in profitability, would serve Moscow immeasurably as it continues its seemingly never-ending escalation of warfare in neighbouring Ukraine.
Another BRICS partner, China, would conversely see its heavily oil-reliant economy significantly damaged by price increases. China’s refineries, whimsically known as ‘teapots’ for their capacity to keep pouring inordinate amounts of petroleum products into the Chinese market, have relied on deeply discounted oil imports to keep feeding the Chinese economy. Even with continued discounting, China’s economy is so strained that further cost-base increases associated with refining will have an over-sized impact on the economy. On 26 September, Reuters reported that Beijing plans to issue special sovereign bonds worth about 2 trillion yuan ($284 billion) later this year as part of a fresh package of fiscal stimulus measures in an attempt to reach its 5% growth rate which analyst anticipate the country to miss.
Saudi Arabia’s new BRIC partners, China and Russia, now stand in opposition to each other due to the Riyadh’s increase in Arab Light Oil all while the Kingdom reaps the financial rewards of higher profits and what appears to be a gambit to increase its market share.
In addition to the 90-cent base price rise in Arab Light Oil, the shipping industry has been forced to raise its costs. The 30% increases in shipping costs are primarily associated with the significant danger incurred by transporting oil in shipping lanes routinely attacked by Houthi rebels, another Iranian ally. Insurance costs have also skyrocketed over the past year due to the risk of attacks on global shipping, most sharply for oil tankers.
Saudia Arabia’s market gamble for increased profits may serve their economic goals but it creates for them significant diplomatic problems with some of their biggest oil and political clients – China and Russia. Riyadh may want to re-think its policy of enriching themselves by keeping oil prices high and consider the greater collateral costs of destroying Beijing’s careful efforts to reinvigourate its struggling economy. As Moscow will share in Riyadh’s increased profitability driven by artificially increased prices the fear is that it will drive further instability by sustaining its war on Ukraine.
Of course, any dent in Russia’s oil exports would be beneficial to Saudi Arabia. Further production problems owing to Russia’s aging infrastructure or the increase of precision attacks on Russian refining, processing and storage facilities would severely restrain Moscow’s access to much needed cash. Given sanctions regimes, accessing materials and technology to keep refining at current capacity eludes Moscow. Russia also realises their soft-underbelly remains the security of its oil tankers, even their clandestine shipping operations designed to defeat sanction detection. Moscow’s constant posture of belligerence and considering its growing list of enemies willing to act to stymie Russia, Moscow can’t rule-out the likelihood of attacks on its shipping tankers – a situation that would seriously cripple its export capacity and capability. Either eventuality, destruction of its refining capability or tanker capacity are eventualities and not possibilities, would prove a boon to Riyadh who could then exploit the situation for greater market share, enhance its profitability even further and do so while furthering the goal of dampening Russia’s access to cash.
