Saudi Arabia hikes oil prices to 4-month high amid China demand surge

Time of India

12-07-2025

The Kingdom raises crude prices for August, reflecting shifting domestic demand and global export strategy/Image: File
TL;DR: Saudi Arabia has raised its August Arab Light crude price to Asia by $2.20 per barrel, its highest in four months.
This move aligns with peak domestic energy consumption, increased exports to China, and a broader OPEC+ production reset.
Refiners in Asia and Europe are facing higher procurement costs amid changing demand patterns..
Long-term consequences include possible pricing pressure, strategic shifts in refinery sourcing, and accelerated energy diversification within Saudi Arabia.
A Price Hike With Global Consequences
In a move that has caught both traders and analysts off guard, Saudi Aramco raised the official selling price (OSP) of its Arab Light crude to Asia by $2.20 per barrel above the Oman/Dubai average for August deliveries. This represents the steepest premium since April and far exceeds the forecasted range of $0.50 to $0.80 per barrel.
Pricing for European buyers has also risen by $1.40 per barrel for Northwest Europe while other grades such as Arab Medium, Heavy, and Extra Light saw increases between $0.90 and $1.30.
This pricing decision comes amid a convergence of domestic and international pressures: a surge in local power demand, rising exports to China, and a coordinated OPEC+ move to unwind production cuts that were initially implemented to stabilise pandemic-era oil markets.
Why Is Saudi Arabia Raising Prices Now?
One of the most immediate drivers behind the price hike is Saudi Arabia's own seasonal energy needs. With air conditioning usage surging across the Kingdom during the intense summer heat, the country has ramped up its crude burn to fuel domestic power stations. Industry sources estimate that Saudi Arabia could be using up to 470,000 barrels per day of crude for electricity generation, especially as fuel oil has become costlier in global markets.
Simultaneously, demand from Asia, particularly China is rebounding strongly. In August, Saudi crude exports to China are expected to hit 1.65 million barrels per day, the highest level in over two years. Chinese refiners, particularly state-run Sinopec, have increased orders following maintenance shutdowns in the second quarter. This additional pull from China provides Riyadh with the leverage to set higher price points for its crude.
Beyond bilateral trade, the move comes at a time when OPEC+, the alliance of oil-producing nations led by Saudi Arabia and Russia, has decided to raise production by 548,000 barrels per day in August. This is the most significant step yet in a multi-month plan to restore roughly 2.2 million barrels per day of previously withheld output.
Absorbing the Shock: Can the Market Handle It?
Despite this increase in both price and supply, global oil markets have remained relatively stable.
Brent crude futures have hovered around $69–70 per barrel, signalling that demand driven by peak travel season and broader economic recovery is absorbing the additional barrels. Analysts at the International Energy Agency and Saxo Bank suggest that the market remains tight enough in the short term to handle incremental increases without major price collapses.
However, this balance could prove fragile. If OPEC+ continues to restore production through September and beyond, it could begin to weigh heavily on prices.
Several major investment banks, including Goldman Sachs, have forecasted that Brent could fall into the mid-$60s or even low $60s by the end of 2025 if global demand plateaus or weakens.
Implications for Refiners and Global Energy Strategy
The pricing decision has strategic implications for refiners in both Asia and Europe. Asian buyers, already operating on thin margins, may look for cost-effective alternatives or adjust refining configurations to accommodate lower-priced crude blends.
Some European buyers may explore diversifying away from Gulf supplies toward Atlantic basin producers like Nigeria or Brazil, especially if premiums remain elevated.
Saudi Arabia, however, appears willing to accept this trade-off. With spare production capacity estimated at over three million barrels per day, the Kingdom remains the only oil exporter with significant room to manoeuvre. By pricing aggressively, it can crowd out higher-cost competitors particularly in US shale and reassert its dominance in the global supply chain.
This aggressive pricing posture also ties into Saudi Arabia's long-term economic transformation plan, Vision 2030. Oil revenues remain the backbone of the country's public spending, and maximising returns from each barrel sold is a fiscal necessity, especially as the government continues to fund megaprojects like NEOM, The Line, and major tourism investments. The International Monetary Fund estimates that Saudi Arabia needs oil prices in the $75–90 range to balance its budget.
Looking Ahead: Opportunities and
Challenges
The long-term consequences of this pricing move will depend on how global markets evolve over the next six to twelve months. A few possibilities stand out:
First, if supply continues to rise but demand falters, prices could weaken significantly, putting pressure on both Saudi fiscal health and the broader OPEC+ alliance's unity. Second, US shale producers, many of whom have recently slowed drilling activity due to cost constraints, may see an opening to regain lost ground if prices stabilise above $70.
However, they remain highly price-sensitive and unlikely to flood the market as they did in previous years.
Third, Saudi Arabia's continued reliance on crude for domestic power generation underlines the need to accelerate its renewable energy goals. The Kingdom has already announced major investments in solar, wind, and nuclear energy to reduce crude burn and meet its climate targets. Successfully implementing these initiatives will allow it to export more oil in the long run and improve environmental sustainability.
Finally, rising global oil prices often trigger an acceleration in energy diversification efforts worldwide. For countries heavily reliant on imports, higher prices are a stark reminder of energy insecurity and could push them to fast-track their own transition away from fossil fuels.
Verdict:
Saudi Arabia's decision to sharply increase crude prices for August marks a pivotal moment in global oil diplomacy. It reflects not only short-term supply and demand dynamics but also a deeper recalibration of the Kingdom's energy and fiscal strategies. Whether this bold move results in sustained revenues or catalyzes new market disruptions will depend on a complex mix of refinery responses, global demand recovery, and policy shifts in energy-importing nations.
What is clear, however, is that Saudi Arabia is once again reshaping the rules of the game.