Saudis said to have floated oil prices

Press, 20 September 1985, Page 6

Saudis said to have floated oil prices

NZPA-Reuter Washington Saudi Arabia had signed at least three contracts that peg the Kingdom’s crude oil prices to free-floating market values of refined petroleum products, the United States Energy Secretary, John Herrington, said yesterday. Confirming rumours that have circulated in oil markets for weeks, Mr Herrington said that he knew Saudi Arabia had executed such contracts with three oil companies, and was negotiating a fourth. He did not name the companies.

“Effectively, what you are seeing is a reduction of the Saudi Arabian price to what is the spot market,” he told a news conference. The new contracts would effectively price Saudi Arabia’s crude oil at well below its official price of SUS2B a barrel. They would also require the Kingdom to boost its oil output, which could dampen world prices more.

Reports circulating in world oil markets estimated that the contracts signed by the Saudis would require it to boost its oil production more than one million barrels a day over its recent output of 2.5 million barrels daily.

The new Saudi Arabian contracts priced its crude

oil on a “net-back” basis, Mr Herrington said. That means the oil is pegged to the spot market values of refined products derived from it, leaving Saudi Arabia to absorb costs such as transport and processing. “It certainly means that they have lowered their prices to the spot market price,” Mr Herrington said. He gave a warning that it was too soon to tell whether the new moves would have lasting effects or whether they were merely posturing by Saudi Arabia before the meeting of the Organisation of Petroleum Exporting Countries on October 3. “You’re seeing a significant event, you’re not seeing a dramatic event. I think there’s a lot more that we need to know,” he said. Saudi Arabia, potentially O.P.E.C.’s largest oil producer, has been at odds with other cartel members over its assertions that many members have violated pricing and production agreements. In recent months, the Kingdom has threatened sharp production boosts, which would soften world oil prices, unless pricing and production discipline was restored among O.P.E.C.’s other 12 members.