Saudi Aramco Lowers LPG Prices As Oil Falls; It Will Cut Supplies In 2001.

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With world prices of crude oil, natural gas and LPG coming down from record highs in recent weeks, Saudi Aramco has begun to lower monthly postings for propane and butane exports. The Saudi price for November LPG deliveries was $345/ton for the propane/butane mix, a peak. The Saudi company has lowered the December price to $335/ton. An APS source expects another cut for January if oil prices continue to fall in view of Iraq's resumption of oil exports.

Saudi LPG postings were raised considerably in the previous months. The price for October jumped by $30/ton to $325, from $295/ton in September. Saudi Aramco raised the posting again by $20/ton for the following month, with Sonatrach of Algeria raising its prices to $342/ton for butane and $350/ton for propane

Saudi Aramco sets its LPG postings on the basis of two spot tenders per month and its own assessment of spot market trends. But LPG spot prices have been higher than Saudi Aramco's monthly postings since the summer after an explosion at Kuwait's refinery of Al Ahmadi on June 25 caused its three LPG trains to be closed and the July supply market to be tighter.

The reopening of Kuwait's LPG trains subsequently was followed by a tightening of supplies from elsewhere. Spot prices kept rising in the wake of a spiral for crude oil and petroleum products. The margin of spot prices over Saudi postings, which are the basis for LPG pricing by other Middle East exporters, rose from about $5-7/ton in August to more than $10/ton in the subsequent months.

LPG pricing by both the spot market and exporters has been influenced by high prices of naphtha, gasoil and other oil products, themselves influenced by record high crude oil prices in recent months. In the US, where WTI's futures prices influence the world's main crude oil marker Brent, prices of natural gas have risen to an all-time record of more than $9.50/m BTU.

On Dec. 11, amid a cold snap in the US north-east, the January Henry Hub natural gas contract price at NYMEX reached $9.51/million BTU, compared to a December settlement price of $2.914/million BTU on Nov. 1, 1999. But this did not have much effect on heating oil futures prices at NYMEX and gas prices later fell.

The January heating oil contract at NYMEX on Dec. 13 was $94.30/gallon, as the January gas price was $7.96m/BTU. Heating oil futures had reached a peak on Nov. 20, when the December contract price was $110.60/gallon and the December price of gas at NYMEX was $6.285/m BTU. The price of the December gasoil contract at IPE in London hit a record of $322.75/ton on Nov. 20, and on Dec. 13 the January contract price was $256.50/ton. But the January gas contract at IPE on Dec. 13 was 30.280 pence per therm.

The price of WTI - a marker crude oil which does not trade outside the US - began to climb down in late November despite Baghdad's suspension of Iraqi oil exports, because of increased crude oil supplies from OPEC and non-OPEC sources. Prices fell again on expectations that Baghdad and the UN will reach a deal and that Iraqi oil exports would be resumed. As a result, crude oil prices have fallen by more than $6/barrel since November. As Iraq resumed oil exports from the Gulf on Dec. 13, January Brent at IPE fell to $26.15/b and spot Dubai traded at $22.59, while the January WTI contract at NYMEX was $29.25.

Yet, the cold in the US north-east and the rest of the Northern Hemisphere could reverse the trend and oil prices might rise again. This is because there are acute capacity shortages throughout the petroleum industry. As a result of a growing shortage of tankers, for one example, the cost of shipping crude oil from the US Gulf Coast to New York has hit a $4/b record.

World oil prices will move in a roller coaster next year, and LPG prices will track them. They will fall rapidly from March 2001, even if a global recession does not occur. They will rise more rapidly before the end of the third quarter. A recession in 2001/02 will be devastating. This is the dilemma for OPEC, and a bigger irony for the private petroleum industry.