SINGAPORE - Saudi Arabia may slash price premiums on all crude grades it sells to Asia in February to one-year-lows despite the escalation of tensions in the Red Sea, as concerns intensify that supply may outpace demand.

The world's top oil exporter could cut the official selling price (OSP) for its flagship Arab Light crude over Oman/Dubai crude quotes by about $1.70 a barrel in February from the previous month, according to five refining sources surveyed by Reuters, which would be the grade's lowest premium in a year.

The Asian physical oil market weakened sharply over the past month, with the price spread between benchmark Dubai's first- and third-month averaging only $0.17 a barrel in December versus $1.70 a barrel in November, reflecting expectations of less supply tightness in the near term.

While the Organization of the Petroleum Exporting Countries and allies, together called OPEC+, agreed to cut output by a combined 2.2 million barrels per day for the first quarter, market participants questioned whether producers would comply with the pact.

"Saudi Arabia needs to lower prices to defend its market share as the prices for other oil are significantly lower," said one respondent. Prices for medium sour crudes of similar quality to Arab Light are around a $0.60 a barrel premium to Dubai quotes, around $2 a barrel cheaper than Arab Light.

The growing tension in the Red Sea offered limited support to Middle Eastern oil prices as most crude oil is shipped via the Strait of Hormuz to Asia.

"The Red Sea conflict may prompt Mideast oil producers to divert west-bound cargoes to the east to avoid the dangerous zones, which would put more pressure on Asian oil prices," said another respondent.

Saudi Aramco's OSPs are usually released around the fifth of each month, and set the trend for Iranian, Kuwaiti and Iraqi prices, affecting about 9 million bpd of crude bound for Asia.

Saudi Aramco officials as a matter of policy do not comment on the monthly OSPs.

Below are the expected Saudi Aramco official selling prices for February 2024(in $/bbl against the Oman/Dubai average):

January 2024 Change est. Feb OSP Arab Extra Light +3.55 -2.45/-1.25 +1.10/+2.30 Arab Light +3.50 -2.40/-1.35 +1.10/+2.15 Arab Medium +2.75 -2.00/-1.25 +0.75/+1.50 Arab Heavy +1.70 -2.00/-1.20 -0.30/+0.50

(Reporting by Muyu Xu; Editing by Sonali Paul)