July 05, 2012 at 11:18 AM EDT
Saudi price setting
Interesting dynamic at work. Saudis set a spread vs other grades. But there is a ‘market spread’ that reflects ‘quality’. So if they set their spread too low, demand for Saudi crude is higher than otherwise, which causes prices to fall for the other producers as they always sell all of their output at ‘market [...]

Interesting dynamic at work.

Saudis set a spread vs other grades.

But there is a ‘market spread’ that reflects ‘quality’.

So if they set their spread too low, demand for Saudi crude is higher than otherwise, which causes prices to fall for the other producers as they always sell all of their output at ‘market prices’. That is, a ‘too tight’ price spread puts downward pressure on prices.

Likewise, if the Saudis set their spread ‘too wide’, that increases demand for the other producers who are all at full capacity, and therefore drives up prices. So a ‘too wide’ spread puts upward pressure on crude prices.

And, with ‘market spreads’ continuously fluctuating, any given spread set by the Saudis can shift between bullish to bearish at any time.

Very clever, those Saudis!

July 4 (Bloomberg) — Saudi Arabian Oil Co., the world’s largest crude exporter, raised the differentials used to set official selling prices for August of its main grades to Asia, and boosted them for Medium and Heavy crudes to the U.S.

The state-owned producer, known as Saudi Aramco, increased the premium for Arab Light crude to buyers in Asia by 70 cents a barrel to $2.05 more than the average of Oman and Dubai grades, the company said in an e-mailed statement today.

Aramco raised the Arab Extra Light crude formula for Asia by 50 cents a barrel to a $2.70 premium to the average of the Oman and Dubai grades. The company set differentials for Medium and Heavy crudes to the U.S. at narrower discounts for August loadings against the Argus Sour Crude Index, the benchmark Aramco uses for sales there.

The company raised the price for Arab Light from the Egyptian port of Sidi Kerir, two people with the knowledge of the matter said, declining to be identified as the information is confidential.

Saudi Arabia and other Persian Gulf oil producers sell most of their crude under long-term contracts to refiners. Most of the Gulf region’s state oil companies price their oil at a premium or discount to a benchmark.

The following table shows differentials for the regions into which Aramco sells crude in relation to benchmark prices, the month-on-month change and the degrees of gravity as defined by the American Petroleum Institute. Prices are in U.S. dollars a barrel.

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