SAUDI ARABIA - Forecasting Saudi Formulae.

The prices of the Saudi crudes relative to each other are a reflection of their qualities: the yield and sulphur content of the residue (residual fuel oil). When the price of HSFO is high relative to that of crude, Arabian Heavy will be at a relatively small discount to Bwave-1 or vice versa. The price of Arab Super Light (ASL) generally follows the price of naphtha.

The key forecast related to Saudi formula pricing is that of Saudi Aramco's production of high and low sulphur crudes. This leads to the forecast of price differences between low and high sulphur residual fuel oils. The consensus forecast now is that the sulphur penalty will stay relatively high in the near future, as the mix of Saudi crude oil exports has become lighter with lower sulphur content (see Part 2).

Saudi Aramco has since 1994 earned more from east of Suez markets than from its sales to the US and Europe. Sometimes the difference comes to more than $1/b. The same is true in the case of Iran's NIOC, Kuwait's KPC and the other NOCs of the Middle East.

Saudi Aramco has since reduced the volume of medium and heavy crude exports in favour of the lighter grades, with ASL now averaging about 200,000 b/d. But the reduction of heavy grades' exports to east of Suez markets was less severe than in the case of its sales to west of Suez markets.

Saudi Aramco has eliminated the role of middlemen (mostly involved in private Saudi oil firms) by opening its own sales offices in big markets. At the beginning of 1997, Saudi Aramco took over the sale of 400,000 b/d of crudes from BP and Shell, which the two majors used to market against a fee under the Yamamah arms-for-oil deal.

Saudi Aramco has established direct relationships with oil refiners and other end-users for crudes, oil products and gas liquids. Saudi Aramco's term clients for crude oil and products exceed 50 and lift the bulk of the kingdom's exports.

Of strategic importance is the flexibility of Saudi Aramco's crude oil supply system. In the event of emergency, for example, it can quickly pump 5m b/d from the Eastern Province to two Western Province terminals on the Red Sea coast - Yanbu' and al-Mo'ajiz. But the latter terminal relates to a crude oil pipeline from Iraq built by Saddam's Ba'thist regime and seized by the Saudi state in 2001. It is not yet clear whether Baghdad, now that it is controlled by the US, would reclaim both the pipeline and the terminal of al-Moajiz. Saddam's regime did contest the Saudi seizure in 2001. This Iraq factor can become a major issue when US-controlled Baghdad gets ready to launch a massive reconstruction programme, with plans to raise Iraq's oil export potential to the maximum and at top speed (see background in Vol. 65, No. 15, in gmt14SaudiMarktngOct10-05).

Built in the 1980s, the pipeline to al-Mo'ajiz has a capacity of 1.65m b/d, linking Iraq's southern oilfields to the Saudi Red Sea coast. Al-Mo'ajiz lies north of the Saudi terminal of Yanbu'. Saudi Arabia closed the line and the terminal after Saddam's Iraq invaded Kuwait in 1900 (see survey of Iraq in omt20IraqExprtMay14-07).