Saudi Arabia: Working in the background for the EU’s independence from Russian oil?

By Mark Finley

Since the beginning of the Russian invasion of Ukraine, Saudi Arabia has been clear: it will not change its oil policy. The country’s leadership has repeatedly rejected calls by President Biden and oil-importing nations to speed up production. It was this refusal that prompted – to a large extent – the US and its allies in the International Energy Agency to release strategic crude reserves. At their recent meetings, OPEC + member states took less than 15 minutes to agree on keeping their production policy unchanged. The major diversion of Russian oil to India – and a corresponding decline in the Saudi oil market from India – has not been commented on by Saudi officials, with Aramco “protecting” its share of Asia’s major emerging markets.

Saudi-US relations are not at their best. Quite the opposite. On the other hand, the United Arab Emirates benefits from OPEC + – Russia. With oil prices soaring, Saudi Arabia’s GDP grew at a rate of 9.6% in the first quarter of 2022 on an annual basis – the largest increase in more than a decade. Saudi Arabia and its regional allies have abstained – or voted against – US and European initiatives at the United Nations aimed at isolating Russia. Thus, oil consumers under pressure must look elsewhere for a solution.

Is that so? Behind the scenes, the Saudis can “play another game”.

Every month the Kingdom sets the prices for crude oil exports. While the state-owned company Saudi Aramco does not publish its pricing decisions, journalists are able to get prices from Saudi customers. These prices are not exactly real – in essence, Aramco defines a “difference” for each quality of crude oil in relation to the benchmark oil contracts for Asia, Europe and the US. For example, the price for Arab Light for March delivery in Europe was set at Brent minus 90 cents a barrel (see table below).

Saudi Aramco’s global marketing organization – with offices in major cities around the world – closely monitors regional developments in the oil market and this allows them to adjust differences based on “subtle” changes in market fundamentals. For example, if Asia needs more diesel, Aramco may invoice (by that margin) contracts with higher diesel rates to head to Asian markets. It is a highly efficient and up-to-date agency that allows Aramco to maximize revenue from oil sales within the policy framework set by the country’s Minister of Energy.

Aramco regional prices following the Russian invasion of Ukraine paint a very interesting picture of Saudi Arabia’s intentions in recent months – a picture that may contradict Riyadh’s public stance.

For oil deliveries in March and April, Saudi Arabia prices for sales in Asia jumped to record levels. And this does not reflect strong regional demand. Chinese demand has been affected by repeated lockdowns due to the pandemic. After all, as already mentioned, India has dramatically increased its oil purchases from Russia and, accordingly, reduced its Saudi crude purchases.

Under these circumstances, a marketing policy that seeks to maintain sales levels in a weakened regional Asian market should propose to the UK to reduce the price difference relative to Europe and the US. Aramco increased price differences for Europe and the US, but did not do so as quickly as for Asia – especially for Saudi crude, which is the closest substitute for Russia’s main export mix, the Urals (see table above).

So why did the Asian differences increase so rapidly in relation to the differences on the two shores of the Atlantic? It is recalled that Aramco determines the regional differences in order to maximize the revenues within the framework set by the Minister of Energy. If Saudi officials decide on a policy that diverts crude from one market to another, Aramco will price its crude at levels that will allow it to achieve that goal. From the mid-1970s to the early 2000s, the UK frequently discounted the crude it sold to the United States in order to be the country’s leading supplier.

In short, recent disputes could reflect Saudi Arabia’s intention to quietly channel crude into Europe to replenish Russian supplies, as more and more European companies refuse to buy Russian oil. And this, without Riyadh taking a public position in a dispute involving a prominent OPEC + partner. Other suppliers from the Middle East can “play the same game”: the UAE is sending – quietly – more slowly to Europe.

On the one hand, this is how things should work. The oil market is huge and the traders … creative. The global system is constantly changing regional prices and flows to adapt to the ever-changing balances between supply and demand. It is reassuring that things are working out properly. But the pricing decisions made by Saudi Arabia show that it is a conscious choice by the Kingdom.

This is not a policy of adding extra barrels to the market. It is, however, a policy that helps European buyers adjust more smoothly to their quest to break free from Russian oil. In this sense, it is more an attempt to tame price volatility than to reduce it.

Will the Kingdom continue this approach? Will Russia tolerate losing market share in emerging Asian markets in violation of its long-term strategic goals? Are these pricing decisions a “marketing” maneuver or a conscious choice? How would the Saudis react to a full EU embargo on Russian oil? Time will tell … Especially since no official announcement has been made by the Saudi government or Aramco. Since the prices are announced every month, it will not take us long to find out!

For now, with Congress and the US government considering legislation to “warn” Britain and its allies of rising oil prices, this Saudi tactic could be a sign of “silent cooperation.” So silent that it can easily be distracted.