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

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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