SAUDI ARABIA DECIDES TO SHIFT OIL PRICE AWAY FROM

C O N F I D E N T I A L SECTION 01 OF 02 RIYADH 001526 SIPDIS STATE FOR S/CIEA GOLDWYN, EEB DAS DOUG HENGEL, AND NEA/ARP DOE FOR AL HEGBURG, JIM HART E.O. 12958: DECL: 11/15/2019 TAGS: EPET ENRG PREL SA SUBJECT: SAUDI ARABIA DECIDES TO SHIFT OIL PRICE AWAY FROM WTI Classified By: Ambassador James B. Smith, reasons 1.4 (b and d). ¶1. (U) On October 28, Saudi Arabia announced that its state oil company, Aramco, would stop using the price of West Texas Intermediate (WTI) as the benchmark for pricing its oil as of January 1, when Aramco will shift from WTI, which is traded on the New York Mercantile Exchange (NYMEX) to an index maintained by London-based Argus of U.S. Gulf sour crudes. Aramco has used the WTI benchmark since 1994. A number of international oil publications attributed the switch to Saudi dissatisfaction with an abnormally large disconnect this year between WTI prices and those of other European benchmarks (e.g., Brent). WTI prices fell $12 below other international benchmarks this spring, vice its usual premium of $1-2 per barrel, largely based on issues related to domestic U.S. crude inventories and refining operations. ¶2. (C) While Ministry of Petroleum officials have not made any public comment about WTI, the CEO of Aramco, Khalid Al-Falih, told an energy publication that WTI "has really become disconnected with the market where we sell and what we sell," noting that Aramco made the switch to provide Aramco's main buyers with a more "transparent, fair and predictable" crude benchmark. Assistant Oil Minister Prince Abdulaziz bin Salman largely echoed these comments on November 16, noting that Saudi Arabia made the switch to be more competitive versus its competitors that are also selling large volumes of more sour crude to the U.S. Gulf Coast. The Prince expressly denied there was any political motivation, noting that the Argus index is also based on U.S. crude sales. He forecast it will increase certainty about prices, which will reduce the financial exposure both Aramco and its customers faced with the WTI benchmark. The Prince said WTI is affected in his view by being landlocked and having limited storage facilities, both of which tend to make it more volatile. The Prince summed up the discussion by saying that WTI had become "too much like gambling." ¶3. (SBU) A number of market players, including local representatives of international oil companies, largely dismissed the effect of the switch on Saudi oil policy or on international oil markets for the long term. As one company executive put it, the only impact on most companies will be changing the formulas they use in their pricing software. Several representatives also noted that the Argus benchmark may prove less volatile than WTI, as it is likely to be less subject to (sometimes wild) swings in the U.S. domestic gasoline market. There was general consensus that the move may reduce volumes traded on NYMEX. Subsequent press reports suggest other producers are looking at following the Saudi lead towards the Argus index. ¶4. (C) A senior local economist doubted that the move would have much long-term effect on the price of Saudi oil, noting that it had actually been an anomaly for Saudi to benchmark its crude against a crude like WTI that had such a small physical market. For that matter, he noted that Brent is also declining in volumes delivered, which would suggest that Saudi ultimately develop its own Arab Light benchmark, which would more closely track their actual physical deliveries. In that regard, the Dubai Mercantile Exchange has been trying to persuade Aramco to use its exchange as a benchmark for its crude sales to Asia. ¶5. (C) Saudi Ministry of Petroleum officials remain concerned about speculation in international oil markets. A Saudi Ministry of Petroleum official recently noted at an IEF presentation that speculation had caused a lot of the runup in prices in 2007 and 2008. He argued that volumes of oil traded were 20 times the volumes physically delivered, and attributed much of the difference to speculation. One OPEC oil economist noted that the "financialization" of oil markets in 2008 had exacerbated the rise and fall of prices, although he said it was hard to quantify how much was a result of speculation and how much was a result of market fundamentals. He cited significant price changes, including a one-day change of $16 per barrel in the price of oil in 2009, as evidence that some speculative pressures remain in the market. He concluded by noting that speculation and the financialization of energy markets makes it much harder for producers to plan long-term investments, as they lack accurate price signals on which to plan projects that may take 10-20 years to develop and mature. ¶6. (C) Comment: We tend to agree with the local representatives that this change will not have a big impact on Saudi oil policy. One element of the move may be a desire RIYADH 00001526 002 OF 002 to send a political message to international markets that the Kingdom is willing to take steps to reduce speculation, which it believes makes oil markets more volatile. (U) This message is a joint cable with Consulate Dhahran. SMITH