By Florence Tan
SINGAPORE (Reuters) - Top oil exporter Saudi Arabia may raise the official selling prices (OSP) for most of the crude grades it sells to Asia in July for a second month, possibly raising flagship Arab Light to its highest since February 2014, trade sources said on Friday.
The OSP hike follows signs of increased demand for Middle East crude oil as refiners gear up for the peak summer oil consumption period and increased buying by Royal Dutch Shell during the price assessment window operated by S&P Global Platts last month.
The premium between first- and third-month cash Dubai benchmark prices widened by 40 cents a barrel during May from April. This backwardation, or when prompt prices for a commodity are higher than those in future months, indicates rising demand for prompt supplies.
Dubai's strength may mean Arab Light's OSP for July could rise by as much as 40 cents a barrel to as much as $2.30 a barrel above the average Oman and Dubai quotes published by Platts, from $1.90 in June, according to a Reuters survey of five refiners and traders.
That would be the highest Arab Light OSP since February 2014 when it was set at $2.45 a barrel, Reuters data showed.
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Still, four of the five respondents are hopeful the July price hike will be smaller than 40 cents because of lower jet fuel margins and as a big price hike would make Arab Light uncompetitive against Middle East and Russian grades of similar quality.
"I recommend Saudi to keep the Arab Light price the same because they (unexpectedly) raised the price in May," a crude buyer at a North Asian refiner said.
Asian refiners are also buying record volumes of U.S. crude for arrival in the third quarter to replace Middle East, Russian and African oil after U.S. benchmark grade West Texas Intermediate fell to the widest discount against Brent since early 2015.
In contrast, higher fuel oil margins last month and falling Venezuelan production are supporting higher OSPs for heavier grades.
The July OSP for Arab Heavy crude could rise by between 40 cents to 50 cents a barrel, narrowing the price spread between light and heavy grades, the respondents said.Saudi crude OSPs are usually released around the fifth of each month, and set the trend for Iranian, Kuwaiti and Iraqi prices, affecting more than 12 million barrels per day (bpd) of crude bound for Asia.
State oil giant Saudi Aramco sets its crude prices based on recommendations from customers and after calculating the change in the value of its oil over the past month, based on yields and product prices.
Saudi Aramco officials as a matter of policy do not comment on the kingdom's monthly OSPs.
(Reporting by Florence Tan; Editing by Christian Schmollinger)