Filenews 6 May 2022
By Mark Finley
Since the beginning of the Russian invasion of Ukraine, Saudi Arabia has been clear: it will not change its oil policy. The country's leadership has repeatedly rejected the demands of President Biden and the oil importing states to accelerate production growth. It was this refusal that pushed - to a large extent - the US and its allies at the International Energy Agency to unleash strategic crude reserves. In their recent meetings, OPEC+ member states took less than 15 minutes to agree to keep their production policy unchanged. The large diversion of Russian oil to India - and a corresponding decline in India's purchase of Saudi oil - has not been commented on by Saudi officials, with Aramco "protecting" its stake in Asia's major developing markets.
Saudi-US relations are not at their best. Quite the contrary. On the other hand, the Arab Kingdom benefits from OPEC+ - Russia. With oil prices soaring, Saudi Arabia's GDP grew at a rate of 9.6% in the first quarter of 2022 on a year-on-year basis - the biggest increase in more than a decade. Saudi Arabia and its regional allies abstained - or voted against - US and European initiatives at the United Nations aimed at isolating Russia. Thus, oil consumers who are under pressure must look elsewhere for a solution.
Indeed, is that the situation? Behind the scenes, the Saudis may "make another game."
Each month the Kingdom fixes prices for crude oil exports. While state-owned company Saudi Aramco does not make its pricing decisions public, journalists are able to get prices from Saudi customers. These prices aren't exactly the real ones – essentially, Aramco defines a "difference" for each crude quality compared to the contracts of the benchmark oils for Asia, Europe and the US. For example, the price for the Arab Light march delivery in Europe was set at the price of Brent minus 90 cents per barrel (see table below).
Saudi Aramco's global marketing organization - with offices in major cities around the world - is following very closely regional developments in the oil market and this allows them to adjust differences based on "subtle" changes in market fundamentals. For example, if Asia needs more diesel, Aramco may price (with this difference) the contracts of the types of crude that yield a higher percentage of diesel to head to the Asian markets. This is an extremely efficient and informed organization, which allows Aramco to maximize revenues from oil sales within the policy framework set by the country's energy minister.
Aramco's regional prices after the Russian invasion of Ukraine give a very interesting insight into Saudi Arabia's intentions in recent months - an image that may contradict Riyadh's public stance.
For oil deliveries in March and April, Saudi Arabia's prices for sales to Asia soared to record levels. And this does not reflect strong regional demand. Chinese demand has been affected by repeated lockdowns due to the pandemic. And besides, as has already been mentioned, India dramatically increased its oil purchases from Russia and correspondingly reduced the Saudi crude markets.
Under these circumstances, a marketing policy that wants to maintain sales levels in a weakened regional Asian market should propose to the UK to reduce the price difference compared to Europe and the US. Aramco increased the price differences for Europe and the US, however it did not do so as quickly as for Asia - especially for Saudi crude which is the closest substitute for the main Russian export mix, Urals (see table above).
Why, then, have Asian differences increased so rapidly in relation to the differences on both sides of the Atlantic? It is recalled that Aramco determines regional differences to maximise revenues within the framework set by the Energy Minister. If The Saudi decision-makers decide on a policy that diverts crude from one market to another, Aramco will price its crude at the levels that will allow it to achieve this goal. From the mid-1970s to the early 2000s, the Kingdom often made discounts on the crude it sold in the United States with the goal of being the country's leading supplier.
In short: the recent differences could reflect Saudi Arabia's intention to quietly channel crude into Europe to replenish Russian supplies, given the refusal of more and more European companies to buy Russian oil. This is without Riyadh taking a public stand in a dispute involving a prominent OPEC+ partner. Other suppliers from the Middle East may "make the same game": the United Arab Emirates is quietly sending more crude to Europe.
On the one hand, that is how things should work. The oil market is huge and the dealers... Creative. The global system is constantly changing regional prices and flows to adapt to the ever-changing balances between supply and demand. It is reassuring that things are working as they should. But the pricing decisions taken by Saudi Arabia show that this is a conscious choice by the Kingdom.
This is not a policy of adding extra barrels to the market. It is, however, a policy that helps European buyers to adapt more smoothly to their efforts to become independent of Russian oil. In this sense, it is more of an attempt to harness price volatility than to reduce them.
Will the Kingdom continue this approach? Will it tolerate losing a share of Russia's developing markets in Asia in violation of its long-term strategic objectives? Are these pricing decisions a "marketing" manoeuvre or a conscious choice? How would the Saudis react to a complete EU embargo on Russian oil? Time will tell... Especially since no official announcement has been made by the Saudi government or Aramco. Since prices are announced every month, it won't take us long to find out!
For now, with congress and the U.S. government considering legislation aimed at "admonishing" the Kingdom and its allies to raise oil prices, this Saudi tactic may be a sign of "silent cooperation." So silent that it can easily be distracted.
