SAUDI ARABIA - Export Pricing & Marketing.

Saudi Arabia and the other main Middle East oil exporters still refuse to have any of their crudes used as a marker for spot or forward trading. As a result, spot and forward trading in Dubai crude, as a marker for sour grades, is dwindling because production of this grade is falling below 200,000 b/d in the coming years. Saudi Aramco, whose pricing system is followed by most exporters in the Middle East, insists that the buyers of its crudes are refiners and will under no conditions be resellers.

Saudi Aramco has a dynamic marketing unit, which applies formula pricing for crude oil sales adjusted monthly to the following benchmarks and markets: (a) dated Brent for Europe, (b) Dubai/Oman for the east of Suez, and (c) WTI for the US and the Bahamas. Since 1994, it has reduced the export of heavy/sour crudes and raised the volume of lighter grades in a move which has affected oil pricing worldwide. In the process, it has maximised the benefits from the spot markets, with monthly price adjustments occasionally matched by a slight increase or decrease in the supply of heavier grades.

The prices of WTI and Brent are set mainly by futures trading on NYMEX and IPE. In addition, the forward market for Brent is strong. Traders can forecast Saudi Aramco's price adjustments months ahead, by monitoring the parameters which the company uses. The prices of the markers can change daily relative to each other, as the prices of refined oil products change in the bulk markets, and so does the price of ocean freight. There is a further complication when WTI and Brent are used as markers for pricing high sulphur crude oils (the sulphur contents of the residues).

Brent and WTI are low sulphur crudes and provide low sulphur residual fuel oils. They can be sold as such or used as cat-cracker feedstocks. Allowance is made for the sulphur contents of the crudes in any pricing formula. Dubai is a sour crude and the only marker in the world for sour crudes, but its volume is shrinking due to a steady decline in Dubai's production.

When revising the parameters, information is available on stocks, freight rates, forecasts of supply and demand, refinery margins, price forecasts and other market information. Sometimes the information will give a reliable picture of the oil market for the months ahead; other times the forecasts will be less reliable. The key decision for Saudi Aramco to make each month is to set the formulae to maintain the sales levels of Saudi crudes so that its desired production level is achieved. If the prices are set too high, liftings could suffer. But if the price is set too low, there is unnecessary loss of revenue and the possibility of putting downward pressure on the world crude oil price level.

Saudi Aramco influences the world oil markets by adjusting the level of its production and by changing the mix of light and heavy crudes produced in one month. There is some control of stocks of crude oil afloat and in owned storage. The landed prices of crude oil can be controlled to some extent by the use of tankers owned and chartered by Saudi Aramco's shipping unit, Vela International.

Saudi pricing should not be assessed in the context of world crude oil production. So much of the world's production is inelastic. Even with the Middle East crude oil export level, some of it is inelastic. Thus the pricing of Saudi Arabia's current 5.57m b/d of crude oil exports is of big importance in the physical trade of crude oil worldwide (see study of the Saudi formula in the October 1995 survey of Saudi Arabia, Vol. 45).

In export sales of oil products and gas liquids, taken over in 1993 from Samarec (now an Aramco unit), Saudi Aramco usually asks for the highest premia possible over spot prices. This is in line with the company's aim to maximise revenues, having cut operating costs sharply in recent years. From Oct. 1, 1994, it has applied a new "Contract Price" for LPG, which occasionally results in a margin of $10-20/ton over current spot prices. It abandoned the "Petromin formula" of pegging LPG prices to the BTU value of Arabian Light crude oil, a move which upset many of its term clients.

The US is regarded as the most important market for Saudi crudes. This is mainly for political reasons. The leadership in Riyadh always wants to see US dependence on Saudi oil strong and increasing. For example Saudi Arabia was the number one crude oil supplier to the US in the first half of 1999, with 1.478m b/d in the first quarter and 1.401m b/d in the second quarter. It was followed by Mexico (1.3m b/d in 1Q & 1.265m b/d in 2Q), Venezuela (1.166m b/d in 1Q & 1.2m b/d in 2Q), Canada (1.12m b/d in 1Q & 1.1m b/d in 2Q). Iraq became the No. 5 crude oil supplier to the US in the second quarter, with 745,000 b/d.

Saudi efforts for a strong market share in the US have included talks on the proposed leasing of space in the American Strategic Petroleum Reserve (SPR). Negotiations to that effect took place in February 1997 during a visit to the US of a Saudi delegation headed by Prince Sultan. The idea was to store Saudi crude oils in two or three of SPR's caverns for commercial purposes.

                QUALITIES OF ARABIAN AND REFERENCE CRUDES

Crude Oil              deg. API     % Residue>650 deg.F   % S in Residue
Arab Super Light*          50               15                 0.2
Arab Berri                 39               39                 2.1
Arab Light                 34               45                 3.1
Arab Medium                31               50                 3.9
Arab Heavy                 27               54                 4.3
Kuwait                     31               45                 2.5
Brent                      37               37                 0.6
WTI                        40               31                 0.6
Dubai                      32               45                 3.0
Oman                      34               42                 1.4