Saudi oil price cuts respond to market not politics: Saudi source

London (Platts)--7Sep2004

Saudi Arabia's deep price cuts for October sales to western customers
announced this week have nothing to do with the kingdom's oil policy but are a
response to market conditions, a Saudi source said Tuesday. Saudi Aramco
Monday slashed crude prices for Europe and the US by as much as $2.25/bbl.

Saudi Arabia has steadily boosted oil output over the summer in a move aimed
at cooling down oil prices, and Monday's steep crude price cuts are being seen
as a clear indication that Riyadh is ready to maintain the high production
volumes despite international crude benchmarks having fallen by more than
$6/bbl since US light crude traded at an all-time high of $49.40/bbl and North
Sea Brent at $45.15/bbl on August 20. But the Saudi source insisted that
Aramco's price moves were market- rather than policy-related. "Basically the
pricing mechanism has nothing to do with oil policy but is purely a marketing
issue," he said, adding that price moves were based on several factors,
including "the situation in the market, refining margins, competition."

Competitiveness will almost certainly have featured as a factor in the price
cuts, European industry sources said, referring in particular to Russian Urals
crude. "They are always looking at Urals, because Urals is the benchmark in
the Mediterranean," a refining source said, noting that Urals had been heavily
discounted over the past month. "Urals trades now at [dated Brent] minus
$4.30/bbl, last month it was -$2.70 or $2.80. Perhaps this is the reason," the
refining source said. "All the producing countries have to try to adjust
prices so that the crude is competitive," the source continued, expressing the
belief that the cuts were not meant to market the Saudi oil more aggressively.
But another source disagreed. "They want to push more heavy stuff in the
market," he said. "They've increased substantially their production and have
to push it into the market now." Furthermore, this source predicted, refinery
maintenance in the Mediterranean, scheduled for September and October, "will
affect the Saudis so they may try to push the material to the States or Asia."

Dresdner Kleinwort Wasserstein analyst Mehdi Varzi said the Saudi price cuts
sent "a strong message" to the market. "By indicating they are willing to cut
prices so far, it means they are going to continue to push barrels onto the
market," he said. The week ahead, meanwhile, should provide further clues as
to the Saudis' plans when Aramco tells customers how much oil they will be
able to lift in October. Soundings Tuesday among European term lifters
suggested that some expected to see their allocations largely unchanged from
September. "In terms of volume I expect the same allocations," a refining
source said. A number of sources said they expected volumes to remain 25% or
so below full contract volumes, similar to September allocations. "It's below
the contractual volume but what we received in September was much more than in
February, March," a refining source said. A number of European refineries said
they expected to receive their allocations later this week or early next.

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