Saudi Arabia has typically focused its production cuts on its heavier barrels to maximize revenues, but its latest wave of supply curbs are so sizeable that its more lucrative medium and lighter grades – already facing intense competition from discounted Russian crude – will be significantly impacted, as well, according to analysts.

The OPEC+ kingpin on June 4 announced its latest surprise cut of 1 million b/d, to take effect in July, on top of existing 1.5 million b/d of output reductions it is already implementing. The July cut will take Saudi Arabia’s crude production to about 9 million b/d, its lowest since June 2021, and will come as domestic consumption is likely to peak due to power generation for air conditioning use in the summer.

In unveiling the cut at a press briefing after OPEC and its allies met in Vienna, Saudi energy minister Prince Abdulaziz bin Salman said he would leave refiners in “suspense” over how it would be apportioned among the country’s crude grades, which range from Arabian Super Light to Arabian Heavy.

Onshore fields are generally the source of Saudi Arabia’s lighter crudes, while offshore production mainly yields the medium and heavy grades.

Arab Light is the largest stream, with average production in 2022 of 5.42 million b/d. It is a medium sour grade, with a sulfur content of 1.96% and API gravity of 33.3, according to the Platts Periodic Table of Crude by S&P Global Commodity Insights.

Initial impact

Analysts said the new cuts will first remove significant volumes of its heavy and medium sour crude grades from the market.

“In order to maintain some market control and some market share, they are likely to maintain the supply of lighter crude, whereas the heavier crude, there might be more deeper cuts,” Arun Leslie John, chief market analyst at Dubai-based Century Financial, said.

A day after the surprise 1 million b/d cut was announced, state energy giant Saudi Aramco increased its official selling prices (OSPs) across the board.

OSPs for the US, which is a significant buyer of Saudi heavy crude grades, saw the biggest increase.

Prices of all grades into Northwest Europe as well as the US were raised by a uniform 90 cents/b from last month, while for Mediterranean markets, prices of all grades were raised by a uniform 60 cents/b.

“It makes it much more expensive for the US importers especially for heavier crudes from Saudi Arabia,” John said.

Deeper impact

While heavier crudes will suffer the cut, the magnitude of reduction is so large that lighter grades are likely to be impacted, according to Dong Wang, Middle East oil markets analyst at S&P Global.

“Considering the complexity of managing this massive production cut at operation levels in various fields, all crude grades from Saudi Arabia will be affected this time,” he said.

“In terms of sheer volume, Arab Light will be cut the most, as the medium sour grade represents over half of country’s total production,” he added.

Saudi Arabia’s exports of crude to Asia fell to their lowest level since June 2021 in May, when the producer sold 5.616 million b/d to the region, according to Kpler shipping data.

Among the grades, Arab Light exports to Asia tumbled 488,000 b/d, or 21%, on the month to 1.808 million b/d in May, representing the largest volume reduction.

Arab Medium exports, meanwhile, fell 43,000 b/d, or 5.9%, on the month to 677,000 b/d.

“Supply of Arab Heavy will also be tightened in July due to not only the production cut and but also the heightened demand for crude burn for power generation in summer season,” Wang said.

“When cutting a smaller volume, heavier ones will be the first to slash. However, this time the cut is massive, they will inevitably touch Arab Light,” he added.

Russian flows

Saudi Arabia is also prioritizing its medium sour and lighter grades in this round of cuts as they are very similar to Russian Urals being traded widely in the Asian markets.

Urals is somewhat close in specification to Arab Light, with 1.7% sulfur and 31.7 API gravity, according to the Platts Periodic Table of Crude. Under severe western sanctions, Russia has been selling Urals at massive discounts to China and India.

“There’s been a lot of substitution in China and India on that basis of taking the Russian crudes,” said a market analyst who did not wish to be named.

“The backing out of Saudi crudes from China, and India is probably a lot of that reason why they cut those lighter grades because the quality is similar,” he added.

Russian Urals are currently are currently trading “in the ballpark of $50/b in Asia,” according to a trader, severely undercutting Saudi flows to the region.

Arab Light sold into Asia and assessed on the basis of DME Oman Crude is priced at a premium of $74.71/b.

Due to the OSP hikes, Asian refiners are shying away from buying Saudi grades, switching up their purchases with spot cargoes of other Middle Eastern crudes, he added.

Summer burn

Saudi Aramco declined to comment, while the Saudi energy minister did not respond to queries.

The country, however, is unlikely “to fuss over” market share, which will remain under pressure for Riyadh and other producers exporting sour crude as long as Russian Urals sell for 30% discount, Vandana Hari, founder and CEO of Vanda Insights, said.

Saudi Arabia’s cuts also come into force at a time of seasonal spike in demand due to greater demand for cooling in the summer. The country in recent years has burned around 500,000 b/d of crude in the summer to meet peak electricity demand, reducing the volumes it has available for export. However, analysts say Saudi Arabia may take advantage of discounted Russian oil to use in its power generation plants instead of its own crude.

“Some of that 1 million b/d will be changed from export and pushed down internally, for their own their own refining/power needs,” said the analyst who did not wish to be named.

Saudi imports of Russian diesel and gasoil hit a record 168,000 b/d in May, according to Kpler data. Flows for June already surpassed May levels with imports at 191,000 b/d on June 12.