By Clyde Russell

Saudi Aramco has slashed its crude oil prices for Asia for August-loading cargoes, in a move that appeared to signal intent to regain market share and recover volumes after the Iran war.

But even the record cut in the August official selling price (OSP) may not be enough as crude from rival Middle East producers, as well as from exporters in Africa and the Americas, is likely to remain more competitive than Saudi grades.

Aramco TADAWUL:2222, the world's biggest oil exporter, set its OSP for its main Arab Light grade at a discount of $1.50 a barrel to the regional Oman/Dubai benchmark for August, the state-controlled company said in a statement on Monday.

This was down $11 a barrel from the July OSP and was the biggest cut in Reuters records dating back to 2003.

It also took the OSP to the lowest level since June 2020, a time when the global crude oil market was massively over-supplied and prices were at multi-decade lows amid the demand loss caused by the COVID-19 lockdowns.

The current situation may be something of an echo of 2020 insofar as the market narrative has swung sharply to expectations of over supply, largely on the view that the conflict between the United States and Iran is over.

That assumption may yet be tested by events and certainly the two parties still appear far from a final deal that would cement the 60-day ceasefire agreed last month.

The Saudis and other Middle Eastern producers are working on the assumption that the Strait of Hormuz remains open and that all vessels seeking to transit the narrow waterway will be able to do so, even if this is under some form of Iranian control.

On that basis there is likely to be sufficient crude to meet demand, so the Aramco decision to cut the OSPs to Asia, which takes about 80% of their oil, is likely a move to rebuild market share.

Saudi Arabia's exports were 4.53 million barrels per day (bpd) in June, according to data compiled by commodity analysts Kpler.

June's shipments were up from 3.74 million bpd in May, which was the lowest in Kpler's records going back to 2013, but still some 2 million bpd below the average of 6.55 million bpd in the three months prior to the U.S. and Israeli attacks on Iran on February 28.

CHINA MOVES

A key market for Aramco is China, the world's biggest crude importer, and one where the Saudis have lost market share.

China's imports from Saudi Arabia are estimated at 705,000 bpd in July, up from a 12-year low of 626,300 bpd in June but still less than half the 1.48 million bpd average for the three months leading up to the Iran conflict.

It was no surprise that China cut back on imports from Saudi Arabia as Aramco massively hiked its OSPs in response to the effective closure of the Strait of Hormuz, which tightened supply of Middle East crude.

Aramco was able to re-route much of its exports to its Yanbu port on the Red Sea, but buying this oil came at a massive cost for Asian refiners, with the OSP for Arab Light reaching a record high of $19.50 above the Oman/Dubai average for May-loading cargoes.

To be sure, China also cut its imports from other exporters as well, with seaborne arrivals of 5.91 million bpd in June being the lowest in Kpler data since January 2016 and about half of levels prior to the Iran conflict.

China has a track record of cutting imports when prices rise sharply, but also of boosting arrivals when prices retreat.

The size of the cut for Aramco's August-loading cargoes may well be enough to tempt China's major state-controlled refiners to resume buying full allocations.

But it's not a certainty, as crude from other Middle East producers such as Kuwait, Iraq and the United Arab Emirates is being offered at bigger discounts.

The UAE, which withdrew from the Organization of the Petroleum Exporting Countries and the wider OPEC+ group in May, is said by traders to be offering discounts of several dollars a barrel, much more than the $1.50 that Aramco announced for its August shipments.

The Emirates' main producer, Abu Dhabi National Oil Co, aims to increase its crude production capacity to 5 million bpd by next year, which will allow it to lift exports from the 3.5 million bpd level in the three months leading up to the Iran war.

Overall, the crude oil market appears to be rapidly returning to supply growth and a price war for market share.

But this outcome still rests on a Strait of Hormuz that is fully and sustainably open.

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The views expressed here are those of the author, a columnist for Reuters.