By Florence Tan and Si Liu

Singapore, July 7 (Reuters) - Saudi crude oil remains more expensive to load than some competing Gulf grades despite the kingdom's biggest cut to its crude oil prices sold to Asia in more than 20 years, limiting demand for oil from the pivotal OPEC nation.

The world's largest oil exporter on Monday slashed its official selling price for August for its flagship Arab Light crude to a discount of $1.50 per barrel below the average of Oman and Dubai prices destined for Asia, a drop of $11 from the previous month. It also reduced the official selling prices for its other four crude grades by $11 per barrel.

This sudden change comes in the wake of the interim agreement reached between the United States and Iran in June, which allowed for increased shipping traffic through the vital Strait of Hormuz and the resumption of oil loadings, leading to a drop in global oil prices.

Oil traders said other Gulf suppliers have also lowered their prices to attract demand, and that the waiver of sanctions on Iranian oil sales is intensifying competition among sellers. They added that loading crude oil from within the Gulf remains risky given the fragile agreement between the United States and Iran, which reduces the incentive to buy.

Emma Lee, an analyst at Vortexa, said, "The large reduction in Saudi official selling prices on a monthly basis was not surprising, given that competing crudes in the Middle East are trading at larger discounts in the spot market."

She added, "Weak Asian demand, particularly from China, coupled with the exemption from sanctions on Iranian oil, has intensified competition among sellers and shifted the market in favor of buyers."

Saudi crude oil prices hit record highs in May after the war between the United States and Iran prevented ships from sailing through the Strait of Hormuz, through which a fifth of the world's oil supply passed before the crisis.

Other Gulf oil companies, including Abu Dhabi National Oil Company (ADNOC), Iraq Oil Marketing Company (SOMO) and Kuwait Petroleum Corporation, are selling crude oil at large discounts in an effort to boost demand.

The National Iranian Oil Company is seeking to renew buying interest from its former Asian customers, beyond independent refiners in China, during the 60-day period of US sanctions relief.

Saudi crude is "much more expensive"

Multiple sources at Asian oil refineries and trading firms said that Saudi crude for August loading will be several dollars more expensive per barrel compared to other Gulf crudes, while the cost of chartering a tanker to enter the Gulf remains high.

"I get Upper Zakum and Das crude at a discount of seven dollars, so why would I buy more Saudi oil?" said a source at an Indian refining company.

Another trader said, "Saudi oil coming from inside the Strait is much more expensive." He cited the example of ADNOC's Upper Zakum crude, which is sold at a discount of six to eight dollars to Dubai prices for ship-to-ship transfers at Oman's Sohar port, with the cost of chartering a supertanker ranging from four to five dollars per barrel.

He added that the cost of loading a giant oil tanker, which can carry two million barrels, from the Saudi port of Ras Tanura inside the Gulf would be more than double that, making the cost higher in terms of economic feasibility.

Another source in the trading sector estimated that the cost of loading oil from within the Gulf would be $15 more per barrel compared to shipping from outside it.

As a result, some sources suggested that the giant Saudi state-owned company Aramco would continue to sell its crude oil on the spot market as it competes with other producers in the Gulf.

One trader said, "The Saudis are trying to support prices by refusing to engage in a price war," adding that the official selling price for August was higher than the Dubai benchmark price, which was about $3.70 a barrel lower than Dubai swaps on Monday.

He continued, "They realize the price is too high, but they are holding on to it," adding that this could lead to Aramco losing market share in Asia.