Last week Saudia Arabia confirmed that it would no longer sell its oil at the price of the West Texas Intermediate (WTI) contract, whose price is set at the NYMEX. Some saw it as a key step towards establishing a less US-centric international oil market. Of course, the question of what oil is priced in (dollars, euros, etc.) remains a source of considerable consteratnation.
So what’s the Saudi rejection of WTI all about.
The Telegraph explains that what it really comes down to is the idea that that it’s too susceptible to speculation, and that it isn’t really a good match for its output. For one thing, WTI is sweet and Saudi oil is sour:
Frustration began to mount 18 months ago when the oil price hit record highs of $147 per barrel. This seemed to suggest that there was not enough oil being produced to meet demand. But Saudi Arabia complained that it could not shift the extra 500,000 barrels of oil per day it dumped on the market to try and meet this phantom shortage. Aramco blamed speculators that NYMEX had not kept under control.
At the other end of the scale, when the oil price hit rock bottom earlier this year, the WTI crude benchmark appeared to be too low in relation to global demand. The WTI crude is usually about $1 more expensive than London Brent, but at one point in January, it fell $12 below the rival European benchmark. The problem was inadequate storage at Cushing, Oklahoma, where physical WTI crude is delivered. The reserves were full to bursting point, creating the illusion of an oversupply in the international markets when the severity of the glut was in reality localised to this particular terminal.
So what’s next?
In practice, the shift may not after all make an immediate difference. But all oil market observers will wait to see whether the Saudis really do get a better, more stable price for their oil with the benchmark of sour crudes. Brazil, Venezuela and even Canada could all follow suit if they see that Saudi Aramco has made a smart move.
Some analysts even believe that a total shake-up of global oil pricing benchmarks is possible. There have been signs that the Saudis are looking to experiment with different ways of getting better returns, frustrated by the refusal of Western exchanges to reform the way that oil is priced and sold.
Smaller exchanges, such as the Dubai Mercantile Exchange, which is aligned with the physical market rather than futures, could eventually start stealing market share from the bigger London and New York trading forums.
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