What modern oil market intervention looks like

Posted by Izabella Kaminskaon Jun 15 10:32.

Is this the reason why the rest of Opec were miffed at Saudi Arabia last week?

Reuters reports on Wednesday (H/T John Kemp):

EXCLUSIVE-SAUDI, US DISCUSSED PROPOSAL TO SWAP LIGHT SPR CRUDE FOR SAUDI OIL AHEAD OF OPEC MEETING-SOURCES

SAUDI, US SPR SWAP PROPOSAL WAS NOT PURSUED, SOURCES SAY

WASHINGTON/LONDON, June 15 (Reuters) – It was to be a swap felt around the world — a plan privately discussed by the world’s largest oil exporter and the globe’s biggest consumer to take the heat out of $120-plus oil prices.

In the weeks leading up to the failed June OPEC meeting, U.S. and Saudi officials met to discuss surprising the market with an unprecedented arrangement: exchanging urgently-needed high-quality crude oil stored in the U.S. emergency reserve for heavier, low-quality oil from Saudi Arabia, according to people familiar with the plan.

The idea involved shipping some of the light low-sulphur, or “sweet”, crude out of the U.S. Strategic Petroleum Reserve to European refiners, who needed it after the war in Libya cut off shipments of its premium crude varieties coveted for making gasoline and diesel. In return Saudi Arabia would sell its heavier high-sulphur or “sour” crude at a discount back to the United States to top up the caverns that hold America’s emergency stocks.

It was a striking suggestion, one that would have demonstrated Washington’s readiness to put the SPR to extraordinary use and Riyadh’s willingness to work creatively with consumers to quell high prices. But it did not make it past the drawing board, four sources familiar with the talks confirmed.

The sources disagree on which country proposed the plan. Two said it fell apart because Riyadh was not willing to subsidize European or U.S. customers by discounting its crude prices below market value.

Though, we wonder if Fed Chairman Ben Bernanke may have had anything to do with the swap idea.

All in all, very interesting indeed. And further evidence of an increasingly unilateral Saudi Arabia.

Of course, need we point out, the current reversal of the light sweet-oil arbitrage — thanks to the collapse of the LLS-Brent spread — is having a similar effect by diverting light sweet crudes away from the US and to Europe anyway. And it has been doing so since about the beginning of June, without the need to tap the US Strategic Petroleum Reserve.

As we noted earlier, the arbitrage flip reduces the light sweet crude imported into the US, while still encouraging sour heavier grades to be imported in.

Which makes us wonder if Saudi or the US has opted to intervene in a more direct manner — possibly via the Brent market itself?

Related links:
Re-inventing Opec
– FT Alphaville
WGO – What’s going on in Brent-WTI? – FT Alphaville

This entry was posted by Izabella Kaminska on Wednesday, June 15th, 2011 at 10:32 and is filed under Capital markets, Commodities. Tagged with , .

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