COLUMN-Saudis bet on crude demand rising in Asia: Clyde Russell

--Clyde Russell is a Reuters market analyst. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, April 4 (Reuters) - Saudi Oil Minister Ali Al-Naimi has put Asian refiners' money where his mouth is by raising the price of crude cargoes for May delivery.

Saudi Aramco raised the official selling price (OSP) for its main Arab Light grade for May to a premium of $1.80 a barrel over regional benchmark Oman/Dubai crude, up from $1.30 for April cargoes, and the first increase in three months.

Saudi Aramco, the world's biggest oil exporter, is betting on Al-Naimi's assessment of April 1 that demand in Asia, which takes about two-thirds of Saudi volumes, is poised to rise in the next few months.

There are several reasons to share the veteran minister's view, among them that China's economic growth remains relatively strong and industrial output is expanding once more, and many of the region's refineries have now completed annual maintenance.

But there are equally compelling reasons to be cautious on the oil demand outlook in Asia in the next few months, and perhaps Saudi Aramco was mindful of this as it didn't raise the OSP premium by as much as a Reuters survey of traders expected.

An increase of 80 cents a barrel was forecast for Arab Light for May cargoes, which was well above the 50-cent boost announced Wednesday.

Mitigating against a larger increase are the facts that Asian refinery margins have been weakening, the price of Dubai crude has been increasing relative to Brent, and there is uncertainty over the state of demand across the region.

Refinery margins in Singapore, the regional benchmark, have nearly halved in recent weeks, falling to $5.58 a barrel over Dubai crude on Wednesday from an average of $10.49 in February.

The slump in profits came at a time when as many as 1 million barrels per day (bpd) of refining capacity was offline in the region because of maintenance.

This is normally bullish for cracks, even though fuel demand tends to fall after the winter peak and before summer consumption ramps up.

What the decline in refinery margins shows is that fuel demand hasn't been robust in recent weeks.

Chinese demand is said to be steady rather than strong, as seen by the fact that the nation's refiners have boosted exports, with gasoline shipments rising 33 percent in the first two months of the year.

China also became a net exporter of diesel in the first two months, shipping a net 65,908 bpd, a turnaround from importing a net 7,659 bpd in the same period last year.

China's implied oil demand, which groups crude refined together with net exports but excludes inventory changes, has also been soft, rising a modest 4.9 percent to 10.14 million bpd in February from the same month in 2012.

It appears that so far China's re-acceleration in economic growth back to levels around 8 percent a year hasn't translated into a similar jump in fuel demand.

This is probably because the authorities are emphasising consumer-led growth rather than industry and construction, which are traditionally heavier fuel users.

The picture in Asia's other big crude importers, India and Japan, is also far from clear.

India's imports fell 1.3 percent to 4.06 million bpd in February from January, but the first two months of the year are still up 15.8 percent from the same period in 2012.

Japan's imports slumped 10.8 percent to 3.56 million bpd in February from the same month in 2012, and commercial crude inventories have also been building, gaining 7.9 million barrels to 102.84 million in the week to March 30, the highest in six months.

But most of the available data only goes up to February, so it can't tell much about the current state of demand.

The shape of the futures curve for Oman crude on the Dubai Mercantile Exchange isn't much help either, with the backwardation between the front-month and six-month contracts now steeper than it was a month ago, or even six months ago.

The six-month contract was 2.7 percent below the front-month in early trade Thursday, while a month ago it was only 1.4 percent less, and six months ago it was at a discount of 2.4 percent.

This shows the market isn't expecting demand to surge in the next few months, because if it were, the backwardation would be narrowing.

The premium of Brent crude over Dubai has also been narrowing, as shown by the exchange for swaps <DUB-EFS-1M> falling to $3.41 a barrel on Wednesday, down from a peak this year of $5.34 on March 4.

In the past year the Arab Light OSP has tended to follow the trend of the Brent-Dubai spread, but with the increase for May cargoes, the Saudis have pre-empted any move higher.

If Brent doesn't become more expensive relative to Dubai in coming weeks, it be hard for the Saudis to maintain a higher premium to Asian customers when June OSPs are announced.

The uncertain demand outlook in Asia justifies the Saudi decision to be cautious in how much they increased their OSPs.

(Editing by Clarence Fernandez)