A new report by Forbes revealed the Saudi suspicious role in the increase in oil prices, accusing the Kingdom of ‘playing ball’ behind the scenes.
The Saudi leadership has repeatedly rebuffed requests from President Biden and leaders of oil-importing countries to accelerate production increases. But recent price differentials could signal an intent to quietly steer crude into Europe to replace Russian supplies, writes the author.
Since Russia invaded Ukraine, Saudi Arabia has made it clear that it is not going to change its oil policy. The Saudi leadership has repeatedly rebuffed requests from President Biden and leaders of oil-importing countries to accelerate production increases—a key factor behind the release of strategic oil stockpiles by the US and its allies in the IEA.
Saudi relations with the US are at a low point, and the OPEC+ partnership with Russia has paid big dividends for the Kingdom. With higher oil prices, Saudi GDP grew by an annualised rate of 9.6% in the first quarter—the fastest pace in over a decade. The Kingdom and its regional allies have abstained—or voted against—US and European initiatives at the UN aimed at isolating Russia.
Each month the Kingdom sets prices for its crude oil exports. While state company Saudi Aramco does not publicize its pricing decisions, enterprising reporters are able to get quotes from Saudi customers. These quotes are not for an actual price; rather, Aramco sets a “differential” for each grade of crude relative to regional benchmark crudes for Asia, Europe, and the US. For example, the price for Arab Light delivered into Europe for March delivery was set at Brent minus 90 cents per barrel.
Saudi Aramco’s global marketing organization—with offices in key cities throughout the world—follows regional oil market developments very closely, and this allows them to fine-tune differentials based on subtle regional shifts in market fundamentals. For example, if Asia needs more diesel fuel, Aramco might price crudes that yield a higher share of diesel to be directed toward Asian markets. It is an incredibly efficient and well-informed organization, allowing Aramco to maximize revenues from its oil sales within the policy framework set by the Energy Minister.
Aramco’s regional prices since the Russian invasion of Ukraine paint a very interesting picture of Saudi intentions over the past few months—a picture that may be at odds with the Kingdom’s public stance.
For deliveries in both March and April, Saudi prices for sales into Asia soared to record levels. Importantly, this is not a reflection of regional solid demand. Renewed COVID-related shutdowns have impacted Chinese demand. And as noted earlier, India has dramatically ramped up purchases from Russia and reduced purchases of Saudi crude.
In these circumstances, a marketing policy of maintaining sales into a weakening regional Asian market SHOULD see the Kingdom cutting its regional differentials relative to Europe and the US. While Aramco’s European and American differentials have increased, they have not increased as rapidly as Asian differentials—especially for Arab “medium”—the Saudi crude that is the closest substitute for the main Russian export blend, Urals.
In other words: Recent differentials could signal an intent to quietly steer crude into Europe to replace Russian supplies given the growing refusal of European companies to purchase Russian oil—without publicly taking sides in a dispute that involves a critical OPEC+ partner. Other Middle-Eastern suppliers may also be playing ball: The UAE is similarly, and quietly, shipping more crude to Europe.
