SAUDI ARABIA - Saudi Export Pricing & Marketing.

Saudi Arabia and the other main Middle East oil exporters still refuse to have their crudes used as a marker for spot or forward trading. As a result, spot and forward trading in Dubai, as a marker for sour grades, is dwindling because production of this grade has fallen below 100,000 b/d and the trade is lacking in liquidity. There is a problem with Oman crude replacing Dubai as a marker (see above).

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 circumstances be resellers. It has a dynamic marketing unit, which applies formula pricing for crude oil sales adjusted monthly to the following benchmarks and markets: (a) the Brent Weighted Average (Bwave-1), which covers the extended trading session as the basis for its crude sales to Europe and gives protection against price distortion; (b) Dubai/Oman for the east of Suez, and (c) spot WTI for the US and the Bahamas. Since 1994, Saudi Aramco 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 Bwave-1 are set by futures trading on NYMEX and the IPE. Traders can forecast Saudi Aramco's price adjustments months ahead, by monitoring the parametres which it 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 Bwave-1 are used as markers for pricing high sulphur crudes.

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 a marker for similar grades. When revising the parametres, 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 monthly pricing is on the basis of fob Ras Tanura.

Saudi pricing should not be assessed in the context of world crude oil production. So much of the world's output is inelastic. Even with the Middle East crude export level, some of it is inelastic.

Thus the pricing of current 6.6m b/d of Saudi crude 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).

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

In export sales of oil products and gas liquids, 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 in recent years.

From Oct. 1, 1994, Saudi Aramco has applied a Contract Price for LPG, which occasionally results in a margin of $15-30/ton over current spot prices. It abandoned the "Petromin formula" of pegging LPG prices to the BTU value of AL, a move which upset many of its term clients.

The US is regarded as the most important market for Saudi oil. This is mainly for political reasons. Riyadh always wants to see US dependence on Saudi oil strong and increasing. Saudi Arabia is often the number one crude oil supplier to the US.

         QUALITIES OF ARABIAN AND REFERENCE CRUDE OILS

Crude Oil       Degrees API     % Residue>650oF       % 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
>TB