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Here’s the Latest Saudi Ploy to Control Oil Prices

by | published June 12th, 2015

From the hundreds of oil benchmark rates used around the world, two set daily have been dominant in determining the prices for the buying and selling of crude. One is Dated Brent, set in London and representing the average price from a basket of North Sea offshore production. The other is West Texas Intermediate (WTI), the grade set in New York.

As I have noted often in Oil & Energy Investor, Brent is applied more often in international trade than WTI. However, both of these benchmarks are better oil grades than well over 80% of all the oil actually traded.

The vast majority of the oil bought and sold is sourer (having a higher sulfur content) than Brent or WTI. That is, both benchmarks are sweeter (having lower sulfur) than the average oil contracted.

Aside from impurities and related matters, the sulfur content combined with the weight of the oil (from light to heavy on the API scale) are the primary factors in determining an actual sale price at discount or premium to a benchmark.

That means most international oil is sold at discount to Brent. That means the producer of the normal sourer crude is losing on the deal.

But something created here in London several years ago is beginning to have a major impact on the global crude oil market. And it is just what the Saudis need in their ongoing battle with American shale production for control of the international market.

A New Way to Determine Oil Delivery Prices

It’s called the Argus Sour Crude Index (ASCI) rate, and it is a new way to determine prices for delivery to U.S. Gulf of Mexico ports of the actual oil grade existing in most of the world.

Advanced by a London trading house after much discussion, it is still not a benchmark of sorts. But after Saudi Aramco (the national oil company of Saudi Arabia) announced it would use the ASCI rate rather than WTI or Brent, matters became a whole lot more interesting.

The ASCI has been allowing Aramco to have a greater say in determining both spread of contract prices and the ability to play certain regions of the world against others. This is because Saudi export crude is quite sour by composition.

The ability of the Saudis to influence prices beyond their own exports does not come simply from being the largest producer and exporter in OPEC. It also comes from something else.

The daily pricing for exports from all OPEC countries in the Persian Gulf and the broader MENA (Middle East/North Africa) region is based largely on the relationship each export price has with the Oman/Dubai average. That average, in turn, is influenced by several more local benchmarks in and around the Dubai market. Those are heavily predicated on Saudi prices.

The Saudis Are Grabbing Control Over Pricing

Well, here’s what all of this means for the ability of the Saudis to leverage prices worldwide and place pressure where they wish. The following is a report from Reuters released late last week:

    Saudi Arabia has raised its official selling price (OSP) for benchmark Arab Light to Asia next month as expected, responding to robust demand for its crude there and to higher consumption at home during the hot summer months.

    OPEC’s top exporter, which has been pumping near record levels for the last two months, pushed up its July Asian Arab Light price by 60 cents a barrel versus June to set it at parity with the Oman/Dubai average.

    State oil company Saudi Aramco said in a statement that it had cut its selling price to Northwest Europe but kept its sales price to the United States unchanged.

    A Reuters survey on Tuesday [June 2] forecast the Arab Light OSP to Asia would be raised by between 25 cents and 60 cents a barrel.

    While a glut is building in the Atlantic basin with sellers of West African and North Sea crude struggling to find buyers, Middle East producers have seen brisk demand over the past month with strong demand from refiners across Asia.

    “There are pockets of strength in Asia,” said Seth Kleinman, head of energy research at Citigroup in London. “Light sweet crude in the Atlantic basin is very weak, but Middle Eastern sour grades are stronger.”

    Saudi Arabia and its partners in the Organization of the Petroleum Exporting Countries… have chosen to focus on building market share rather than defending world oil prices, which are down around 45% from the highs seen in the middle of last year.

    In May, Dubai swaps, the price marker for Middle East crude sold to Asia, flipped briefly into backwardation [where future prices are lower as one moves out into more distant  months] for the first time in months, while global benchmarks Brent and West Texas Intermediate remained entrenched in contango [prices are higher further out].

    The Saudi OSP formula is loosely based on the average monthly changes in the spread between the first and third month Dubai cash prices and refining margins for oil products. Saudi Aramco also bases crude prices on customer recommendations.

    Aramco dropped its Arab Light OSP to Northwest Europe by 25 cents a barrel for July from the previous month to a discount of $2.90 a barrel to the Brent Weighted Average (BWAVE).

    The Arab Light OSP to the United States was unchanged at a premium of $1.55 a barrel to the Argus Sour Crude Index (ASCI) for July.

The Saudis’ Battle Plan Has Been Outlined

OK, there’s a lot of technical stuff here. But cutting to the chase, we have this: The Saudis are playing different ways in determining selling prices for consignments bound for Asia, Western Europe, and the U.S. The Asian pricing base is firmly under their control, while its OSP formula against Brent in Europe and ASCI for the U.S. provides an experiment in fine tuning what the Saudis are charging in an attempt to maximize market share.

I may have underestimated these guys. If you carefully read the above report, a battle strategy is being outlined. The Saudis have an approach developing to respond quickly to positive changes in regional demand levels while at the same time providing additional pressure on the U.S. shale patch…

Without pushing American production up against a wall. Because if that happens (as I have told you in the past) the Saudis will have another problem.

Congress will allow U.S. crude exports across the board and the Saudis will have a much more serious matter to contend with.

I’ll keep you posted on how this battle progresses.

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  1. Ernie Crosby
    June 12th, 2015 at 17:32 | #1

    I agree wiyh your analysis of Saudi global oil pricing strategy where they selectively price segments of the oil market. It’s a brilliant strategy and we will see how this plays out. The Saudis have the production capacity—so lt should prove interesting over the near term.

  2. Al Pfister
    June 12th, 2015 at 19:10 | #2

    So based on this info do you recommend holding on to LNG which you have recommended as a buy previously?

  3. June 13th, 2015 at 13:46 | #3

    On Monday morning I will be putting on a strangle recommended by Dr Kent for USO options . Is there a ratio which should be used as a formula for the number of contracts purchased between puts and calls? Thank you for your consideration on this very important matter and your ideas.
    Sincerely,
    Christy Bellina

  4. emilio hulipas
    June 14th, 2015 at 23:18 | #4

    hi kent,

    it’s interesting to read your articles regarding oil issues. it’s very informative and gates of opportunity are open. I’m interested on this
    extremely rare and highly lucrative opportunity. thanks a lot.

    emilio

  5. IAN
    June 15th, 2015 at 05:51 | #5

    I HAVE READ ON A NUMBER OF OCCASIONS OF COMPANIES CONVERTING WASTE INTO ENERGY, eg. Diesel fuel and electricity.

    ARE THESE VENTURES PROFITABLE AND IS THERE AN OPPPORTUNITY FOR INVESTMENT THERE?

  6. Jhilson
    June 25th, 2015 at 07:51 | #6

    Great write up. Very useful details.

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