Saudi poised to deepen oil supply cuts

SUPPLY CUTS: Saudi Arabia is set to reduce its supply to Asian consumers in Feb. to its lowest level in almost five years. (Getty Images)

Top crude oil exporter Saudi Arabia will deepen its supply cuts in February from January levels to Asian consumers to their lowest in almost five years, industry sources said on Friday, as it strives to support oil prices.

Adding to larger curbs from this month onwards by several OPEC peers, the move by OPEC's most influential member could put a firmer floor beneath the price of Middle East crude and helped send global oil back above $42 a barrel on Friday.

Lower term supplies have forced Asian refiners back to the Middle East spot market, pushing up price differentials of most spot crudes last month, and more rises are expected this month at the expense of grades that are linked to Brent.

Sources with seven Asian buyers confirmed that state oil company Saudi Aramco had notified them of deeper cuts for February, ranging from 7-8 percent to 15 percent, against cuts of 5-10 percent for January.

"The cut was deeper than last month... about 14, 15 percent," a source at a major customer in Japan told Reuters on condition of anonymity as the information is not public.

By 8.21am UAE time, oil stood at $42.79 a barrel, up 79 cents, after having lost around 15 percent over the past three sessions on signs of worsening demand from the United States.

The volumes curbed differ from one refiner to the next as Saudi Arabia likely cut exports of its heaviest and lowest quality grades the most.

"Customers got different cuts because the ratio of grades - Arab Extra Light, Arab light, Arab Medium and Arab Heavy - is different company by company," said a trader.

"Cuts should be deeper than average for customers that lift mainly Arab Medium and Arab Heavy."

With cuts to some refiners as deep as 15 percent, curbs to Asia for February are likely to exceed 10 percent overall, making it their largest since April 2004, when Saudi Arabia cut supplies by between 10 and 15 percent.

An overall cut of 15 percent would be equivalent to around 525,000 barrels per day (bpd) less of Saudi crude heading to Asia, with an average cut of 11 percent worth about 385,000 bpd.

Customers around the region had expected Saudi Arabia to cut supplies more to stay in line with OPEC's aim to reduce output and boost oil prices that have fallen more than $100 from a record-high above $147 a barrel last July.

Refiners measure supply cuts versus the volume stipulated in annual contracts.

OPEC agreed last month to cut output by a record of 2.2 million bpd, taking total curbs since September to 4.2 million bpd, equivalent to 5 percent of global oil supply.

Saudi Aramco had pre-empted the reduction by deepening its supply cuts to Asia for January from 5 percent in December.

Saudi Arabia's sharper cuts add to similar moves earlier this month by other OPEC producers to curb supplies.

OPEC's second-largest producer Iran and Kuwait both said this week they would deepen supply reductions for January, with Iran annoucing its first cuts in more than three years.

The United Arab Emirates announced reductions last month of 10-15 percent for February supplies. Qatar have also signalled cuts.

The OPEC curbs have also led to a sharp reversal of the price spread between Brent and Dubai crude, raising demand for the usually cheaper Middle East grades to the point of making them costlier than higher quality Brent-related crudes.

The Brent/Dubai Exchange of Futures for Swaps (EFS), used as a proxy for the relation between the two bellwether crudes, traded at discounts for the first time on record this week, falling to around a $1.05 a barrel discount on Friday on the Saudi news, down from a 50-cent discount on Thursday.

But Asian refiners said the lower term supplies were still enough for them to run their plants amid low oil demand.

"The programme is still OK. We had prepared for the cuts in advance," a trader with a refiner said.

Other OPEC members Angola, Libya, Venezuela and Algeria have also signalled cuts. (Reuters)

Print | Email | Discuss this article

| Share |

READERS' COMMENTS

Cut supply to America
Posted by troy, dubai, uae on Friday 9 January 2009 at 14:30 UAE time


All the downward pressure on oil prices is coming from the massive increases in the US crude inventories…Traders are ONLY looking at these weekly reports and selling off oil based on the dismal US numbers. So why are all OPEC producers cutting supply to Asian markets only. If they want to make an impact and increase the prices then they should cut supplies to the US. Opec’s foremost target should be reducing the US weekly/monthly US inventory report, that’s the only way to push prices up. Having said that, politics will come into play …who has the guts to pressure the Americans!!

Click here to post a comment

Add your Comment All posts are sent to the administrator for review and are published only after approval. ArabianBusiness.com reserves the right to remove any comment at any time for any reason. Please keep your responses appropriate and on topic.
Name *
Remember me on this computer
Email *	(Your email address will not be published)
City
Country
Subject *
Comment *
Notify me of further comments
Enter the words above *
Please click post only once - your comment will not be published immediately.

MORE FROM ARABIANBUSINESS.COM