Cru­cial agree­ment

Saudi Ara­bia feel­ing ef­fect of OPEC’s deal to re­duce crude out­put

China Daily (Hong Kong) - - FRONT PAGE - By BLOOMBERG

The ef­fect of OPEC’s deal to re­duce crude out­put start­ing next month is al­ready be­ing felt in Saudi Ara­bia, the world’s big­gest oil mar­ket.

OPEC’s big­gest pro­ducer — Saudi Ara­bia is also the world’s big­gest crude ex­porter — is plan­ning to curb the ad­di­tional crude it of­fers to Asia cus­tomers on top of its reg­u­lar sched­uled sup­ply un­der longterm con­tracts, peo­ple with knowl­edge of the mat­ter said.

The cut in such spot cargo of­fer­ings in Jan­uary is part of a strat­egy to im­ple­ment the out­put re­duc­tion deal reached in Vi­enna ear­lier this week, they said, ask­ing not to be iden­ti­fied be­cause the in­for­ma­tion is con­fi­den­tial.

The plan shows one way through which pro­duc­ers will pass on OPEC’s first out­put cut in eight years to users of their sup­ply. It’s also a sign of the shift in pol­icy of Saudi Ara­bia, which had pre­vi­ously led the Or­ga­ni­za­tion of the Pe­tro­leum Ex­port­ing Coun­tries, in a strat­egy of keep­ing taps open to de­fend mar­ket share.

The deal be­tween pro­duc­ers this week is an ef­fort to shrink a global glut that has dragged down bench­mark prices more than 50 per­cent be­low their 2014 highs.

“This sends a sig­nal to cus­tomers in the Asia Pa­cific that you are go­ing to see tighter sup­plies, and this very likely will prompt cus­tomers to ex­pand or di­ver­sify their crude oil sup­ply sources,” said John Driscoll, the chief strate­gist at JTD En­ergy Ser­vices Pte, who has spent more than 30 years trad­ing crude and pe­tro­leum in Sin­ga­pore.

The OPEC “agree­ment is a sig­nif­i­cant and strate­gic shift for the Saudis from their mar­ket-share driven pol­icy for the last two years”, Driscoll said.

Saudi Ara­bian Oil Co, or Saudi Aramco as the state-run com­pany is known, sells the ma­jor­ity of its oil via long-term con­tracts to re­fin­ers. Buy­ers can nom­i­nate to buy more or less sup­plies within a 10 per­cent con­tract tol­er­ance each month, and pur­chase in­cre­men­tal spot sup­plies on top of reg­u­lar vol­umes.

If the cut in spot sup­plies is not suf­fi­cient to bring over­all out­put un­der Saudi Ara­bia’s new tar­get level, Aramco can also sup­ply less oil to term cus­tomers within the tol­er­ance level of sched­uled vol­ume, the peo­ple said. That de­ci­sion would also be based on how much sup­plies cus­tomers seek for Jan­uary after of­fi­cial sell­ing prices for the month are re­leased, they said.

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