Saudi May Cut Oil Supply More As Rest of OPEC Looks On

KUALA LUMPUR (Dow Jones Newswires), December 4, 2008

Saudi Arabian Oil Co.'s surprise increase in official selling prices to Asia, a key market for the state-owned energy giant, may signal that the country is preparing for further reductions in oil supply.

Fellow Middle East producers in the Organization of Petroleum Exporting Countries have lowered OSPs in response to continued weakness in demand, and they have largely failed to adhere to the cartel's recent pledges to cut output.

So the job of shoring up oil prices may be falling squarely on the shoulders of the kingdom, the largest and most influential producer, industry analysts and participants say.

Late Wednesday, Saudi Arabian Oil Co. hiked its OSPs for next month's crude supply to Asia while lowering most prices for the U.S. and Europe.

The company, also known as Saudi Aramco, marked up its Arabian Extra Light oil even though regional producers such as the United Arab Emirates and Qatar cut their prices earlier in the week for similar grades of high-sulfur or "sour" cargoes.

The OSP for flagship Arabian Light was raised for the first time in three months, according to a company notice - despite waning, not strengthening, demand for crude.

"We are totally shocked. The adjustments are quite (unexpected)," said an official at a Southeast Asian refinery that processes mostly Middle East sour crude.

"They've only adjusted for Asia, not Europe or the U.S. Is (demand in) Asia really so much better? We didn't see improvement in product cracks."

Saudi Aramco, which doesn't publicly comment on pricing policy, is widely known to demonstrate an accurate reading of market trends - including customer demand - and the surprise price hikes are fanning speculation that it may be laying the groundwork for a corresponding adjustment in supply.

Oil producers are reluctant to further give up market share - for many, revenues critical to their state budgets - but they have come under intense pressure to do just that to stem the relentless drop in oil prices.

On Thursday, benchmark U.S. crude futures traded around $46 a barrel, at their lowest levels since March 2005 and well off an all-time high of $147.27 registered on July 11.

The global economic slowdown is fueling industry concerns that oil demand will contract this year, for the first time since 1983, analysts say.

Cartel's Discipline Tested
Saudi Arabia and five other Middle East countries are members of OPEC, a group that pumps about 40% of the world's crude.

OPEC announced supply cutbacks in September and October totaling about 2 million barrels a day. Even though this didn't stop prices from slipping further, the group opted at a November meeting to defer further action until a Dec. 17 gathering in Oran, Algeria.

Given the relatively long lead time of about two months between a decision to cut output and an actual decrease in shipments, it appears Saudi Arabia isn't keen to wait.

Last weekend, Saudi oil minister Ali Naimi echoed earlier comments by King Abdullah, saying that the country wants to see oil prices stabilize around $75 a barrel, a level last traded in October.

Meantime, traders noted signs that other Middle East OPEC members aren't toeing the line on cartel policy.

An official with one of Qatar's largest customers, who asked not to be identified as she isn't authorized to speak to reporters, said Thursday the country's state-owned company didn't cut this month's supply, contrary to official announcements.

Qatar - OPEC smallest member by output - will maintain a 3%-5% cut on term volumes, according to Nasser K. Al-Jaidah, the chief executive officer of state-run Qatar Petroleum International.

Buyers "are the ones who want less, and it makes it possible for us (as producers) to follow OPEC," he told Dow Jones Newswires in an interview Wednesday on the sidelines of an industry conference in Malaysia.

Refiners say shipments of up to 5% below agreed volumes don't count as a formal cut, as term contracts typically include an "operational tolerance" clause that offers suppliers some allowance in case of leakage during loading or delivery.

With the exception of the U.A.E.'s Abu Dhabi National Oil Co., state oil companies from all the other Middle East OPEC members have announced cuts of no more than 5% in supply in the past two months.

OPEC members elsewhere, including Nigeria and Venezuela, are already producing far below target levels and aren't embracing additional output cuts themselves.

Asia's oil refiners, while expressing surprise at the Saudi OSP markups, say they're ready to calibrate their throughput in response to poor product demand; many have slashed operating rates as margins slumped.

Significantly, it's unclear whether Saudi action alone will be enough to reverse the price downtrend.

"It's not the time to raise OSPs" as most refiners are considering more run cuts in January and February next year, said an official with a South Korean refinery.

"I think they will cut (supply)," he said of Saudi Aramco. "But I think the supply cut will still be less than the 'cut' in demand."

Copyright (c) 2008 Dow Jones & Company, Inc.

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