Saudi Aramco's decision to increase crude prices for Asia while trimming them for Europe, although reflecting movements in the regional benchmarks, also shows that higher prices have yet to bring demand destruction, says a Reuters analyst.

The world's top oil exporter boosted the premium on April cargoes for Asia of its benchmark Arab Light grade to $2.80 a barrel over Oman/Dubai, an 80 percent jump from March's $1.55.

For Northwest Europe, the discount to the Brent weighted average was widened to $1.25 from 85 cents.

These changes most probably reflect the Saudis' assessment of current market pricing, given that Brent crude has been rising at a faster pace than Dubai, says Clyde Russell.

While not an exact match for the benchmarks the Saudis use, the Brent-Dubai exchange for swaps, which is the premium of the European marker over the Middle East grade, has been widening since falling to $2.37 a barrel on Jan. 27, the lowest in 14 months. 

The spread has almost doubled since then to $4.37 a barrel as Brent gained faster than Dubai amid mounting concern about the potential loss of Iranian crude because of financial sanctions against the Islamic republic and actual output losses from Sudan and Syria.     

The latest Saudi official selling prices also confirm that the huge jump in prices to Asia in December was an aberration, one that was rolled back by steep cuts to Asia in January and February. It now appears that normal service has been resumed, where the changes in the OSPs are tracking movements in the benchmark oil prices more closely.

However, an analysis of the Arab Light premium to Asia and oil prices also shows that the Saudis trimmed premiums last year after crude surged in the first four months.

Brent climbed by about 34 percent between January and its peak of nearly $127 a barrel in early April last year.

The premium for Arab Light to Asia was subsequently cut in May, and raised slightly for June before being cut in July, August and September.

The premiums were lowered even though for those months the Brent-Dubai spread was on a widening trend, suggesting the Saudis were trimming premiums when normally they might have been raising them to reflect changes in the regional benchmarks.

Was this merely a coincidence or was it part of an effort to lower oil prices to boost demand?     

After Brent's peak in April last year, confidence in the world's economic outlook deteriorated sharply amid the sovereign debt crisis in Europe, a spluttering recovery in the United States and signs of slower growth in China.

Brent crude fell below $100 a barrel by October, before recovering as the world economic outlook improved on the back of progress in Europe and stronger data from the United States.

Oil prices have subsequently been boosted by concern over the loss of Iranian barrels as the Western powers step up their campaign to force Tehran to submit to full international scrutiny of its nuclear program.

Brent prices peaked above $128 a barrel on an intraday basis on March 1, just exceeding the level from last April that prompted gloom about the global economy and crude demand destruction.

It appears that for now the Saudis aren't concerned about a repeat of last year's demand destruction, and they may well be right, given that the market is still fretting more about what will happen if the bulk of Iran's 2.5 million barrels a day of oil exports are lost.

However, a tug-of-war between concern about Iran and demand destruction from higher prices may be about to break out, especially with retail fuel prices at, or near, records in much of Europe and heading toward the psychological $4 a gallon level in the United States. - Reuters