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Saudi crude exports have been falling since the US- Iran war began, but the latest slide is no longer just a story of disrupted trade routes. Cargoes scheduled to sail from Saudi Arabia in May are now assessed at roughly 3.9 million b/d (historic lows), while almost every major Saudi buyer – China, Japan, South Korea, India and Taiwan – is cutting nominations for the months ahead. China, still Saudi Aramco’s largest customer, is expected to take only about 600,000 b/d of Saudi crude in June, roughly half April’s volume. Weaker Chinese domestic demand is just part of the explanation. In a market where global oil prices have climbed to record levels, Saudi crude has become one of the most expensive barrels available, and that is now turning from a sign of trade routes’ disruption into a constraint on sales.

Saudi crude exports fell to 4.4 million b/d in March from 7.3 million b/d in February. Among very few other Gulf nations, Saudi Arabia has a route to avoid the blocked Strait of Hormuz – the East-West pipeline that runs from the Eastern Province to Yanbu on the Red Sea coast, with operational capacity at about 5 million b/d (with recently reported maximum capacity closer to 7 million b/d). Not all this crude can be exported – the five refineries on the Saudi Red Sea coast (SAMREF, YASREF, Yanbu refinery, Petro Rabigh and Jazan refinery) together have capacity of around 1.8 million b/d, and that demand still needs to be supplied. However, at current prices, it is loading capacity, tanker scheduling and, most importantly, buyer appetite that matter the most. May export volumes are already at roughly 3.9 million b/d (vs April’s 4.1 million b/d), depending on final liftings and destination assignments.

China remains the largest buyer, but even Chinese demand has started to fade. In April, China received 1.2 million b/d of Saudi crude, down from pre-crisis February volumes of 1.6 million b/d. May arrivals are expected to be closer to 1.1 million b/d, while June is set to fall further. Chinese companies have been steadily reducing their Saudi crude nominations since March. Sinopec, the largest Chinese buyer of Saudi cargoes, nominated 10 million barrels in February and just 2 million barrels in both May and June. Rongsheng, the second-largest Saudi buyer in China, cut its nominations from 7 million barrels in February to 1 million barrels in June. Overall, Chinese nominations fell from 47.5 million barrels in February to 14 million barrels in June (from 1.7 million b/d to 460,000 b/d).

The decline in demand is visible across all other Asian buyers. Japan, which used to buy an average of 1 million to 1.2 million b/d before the crisis, took only about 202,000 b/d in March and April, and only two cargoes sailed to Japan from Saudi Arabia in May, equivalent to roughly 130,000 b/d so far. South Korean loadings in May are expected to fall by about 35% from April, from 780,000 b/d to around 530,000 b/d. India, despite its need for medium-sour grades, is set to receive about 30% less Arab crude in May than in April (roughly 450,000 b/d versus 670,000 b/d). One of the most telling signs is the rising share of tankers loading at Yanbu and then either floating in the Red Sea or heading toward Singapore only to wait offshore for a final destination.

The demand downfall is not happening without additional context. China’s overall seaborne crude imports have been declining steadily since the start of the war in Iran. The fall was relatively modest in March, at about 12% month-on-month, but the monthly drop accelerated to 22% in April. Kpler assessments for May point to another 17% month-on-month decline, taking imports to just 6.7 million b/d compared with 11.5 million b/d in February. The decline is visible across all suppliers, but it is especially striking in Saudi flows.

China’s weak Saudi buying is already visible in the pace of Red Sea loadings – as Saudi Aramco sells through term nominations and the voyage from Yanbu to China takes roughly a month, most of June-arrival cargoes are already on water. By the end of June, Chinese imports of Saudi Arab crude are likely to be around 600,000 b/d. Market analysts point to several reasons for the broader Chinese demand contraction: refinery runs fell sharply, hitting 13.3 million b/d in April, the lowest since August 2022. At the same time, higher gasoline and diesel prices have weakened domestic oil product demand, and restrictions on product exports have crushed refinery economics. Besides, China has started to draw on its own large crude reserves. In April, Chinese oil product exports fell to a decade low of 3.1 million tonnes, deflating crack spreads across the barrel and making it less profitable for refiners to process crude at the same pace as before the crisis. Chinese refiners were reportedly losing around $13/bbl of crude processed in April. In such a market, buyers do not simply want secure barrels, they want the cheapest secure crude they can find.

That is where Saudi Aramco’s pricing mechanism becomes a trap. Saudi official selling prices (OSP) are set as differentials to the Dubai benchmark’s relevant monthly average. The key variable is the OSP differential – the premium or discount Saudi Aramco adds to the benchmark – and that differential is heavily influenced by the Dubai forward curve, particularly the Dubai M1-M3 structure. In simple terms, the front-to-third-month spread shows whether the market is pricing immediate tightness against expected future relief. When the front month trades at a large premium to later months, the market is saying that barrels are needed now, even if prices may fall later.

That is exactly what happened in March and April. Arab Light’s formula differential was around $2/bbl in March, after sitting closer to $1/bbl in previous months. In April, it surged to $20/bbl, before easing to $16/bbl in May. The move reflected unprecedented backwardation in the Dubai curve, as the market cried out for immediate crude supply while still pricing in the hope of a quick crisis resolution that would eventually bring barrels back somewhere in the beginning of summer and push prices lower. But for refiners buying physical Saudi crude, the result was brutal. Through March, April and May, the Dubai benchmark did not fall below $97/bbl (mostly above $102/bbl). Add a double-digit Saudi differential on top of that, and Arab Light became one of the priciest crude options in the market.

The Dubai M1-M3 spread has since eased. In May, it has averaged around $8/bbl, compared with $37/bbl in March and $13/bbl in April. That should mechanically point to a lower future OSP, potentially bringing the differential down from $16/bbl toward $7-8/bbl. But the final decision remains with Saudi Aramco’s executive office, and even a lower differential may not be enough to fully restore demand if Chinese refinery margins remain weak and buyers continue to prioritize cheaper alternatives.

Saudi Arabia therefore, faces a difficult short-term balance. It has the infrastructure to move crude around the Strait of Hormuz, but infrastructure alone does not guarantee demand. Its core Asian buyers are cutting nominations, China’s import appetite has weakened sharply, and refinery economics are forcing buyers to become far more price-sensitive. The kingdom’s pricing formula, designed to reflect market tightness and maximize value in a strong market, has done exactly that, but perhaps too successfully. At a moment when refiners are losing money and crude buyers are hunting for discounts, the most expensive secure barrel can quickly become the easiest one to defer. The result is that Saudi exports are likely to keep falling in the short-term, not because the kingdom cannot move barrels, but because fewer buyers are willing to pay the price Saudi Arabia is asking.

By Natalia Katona for Oilprice.com