RIYADH: When Saudi Aramco announced cutting down the Official Selling Price (OSP) to American refiners last week, the move was seen by many not only as an attempt to shore up its customer base in a market that accounts for more than 20 per cent of global crude demand. Many said it was also to rein in the galloping shale oil production in the US Facts however, state otherwise. In recent months, as US crude production jumped to the highest in three decades, shale oil has been capturing more of the domestic refining market – at Saudi Arabia’s expense.

The Saudi decision to increase discounts on deliveries to US refiners needs to be seen in this perspective. It was basically to protect its competitiveness amid an erosion of its US market share by rival exporters such as Canada and Iraq.

In August, US crude imports from Saudi Arabia slipped below 900,000 barrels per day. With the exception of a brief period in 2009 and early 2010, Saudi exports to the United States has fallen to the lowest level since 1988. US imports from Saudi Arabia in August were just 70pc of the average level for the past ten years which has been around 1.3 million bpd.

Saudi oil, which is priced at a differential to a US sour crude marker, had become too expensive compared to alternatives available to US refiners. Market dictates forced Saudi Aramco to react, cutting the differentials for US refiners by between 45 and 50 cents (depending on grade), while it raised differentials for refiners in Europe and Asia.

Commentators interpreted the US price cuts as a signal of Riyadh initiating a deliberate price-war targeting US shale producers. An otherwise very technical and commercially driven adjustment mechanism was misinterpreted by most pundits. “We see a clear lack of understanding of an OSP’s purpose,” says Morgan Stanley analyst Adam Longson. Ironically the same had happened when Aramco had announced a reduction in Saudi OSPs to Asia last month.

That too had sparked a chatter all around.

A day after the Saudi decision, White House spokesman Josh Earnest said that the US was monitoring the global oil supply and demand situation. However, he remained non-committal on the possibility of Washington opting to replenish the Strategic Petroleum Reserve (SPR).

Phil Flynn of FOXBusiness however, reported that hinting at the possibility of the US increasing the SPR intake, was obviously a thinly veiled message to Saudi Arabia. It was an attempt by the White House to underline they were not happy with the price discounts and to remind there were steps the US could contemplate. And Flynn then says that not only the US government could go on a buying spree to fill up the SPR, so as to shore market prices, it may also levy a tax on Saudi oil.

Later in the day, the Wall Street Journal too reported that BP was going to export ultra-light crude without the permission of the US government in a move that not only began breaking down the US export ban, but was also termed by many as a direct challenge to Opec and other producers.

The Wall Street Journal reported that BHP Billiton had cut a deal to sell about $50 million of ultralight oil from Texas to foreign buyers without formal government approval. The Journal says that this may “be only the first of many such moves as energy companies seek new markets and higher prices for the surge of crude now pumped in the US”.

If the US government remains silent and uses as a loophole the high quality of oil as not fitting the definition of crude oil it will open up the floodgates and unleash US shale oil into the world.

And indeed pundits also failed to take into account that with a growing public budget, the Kingdom could not take the bait and drive oil prices — its bread and butter — down. This would be painful, none argues here too.

Yet, there seems no dearth of conspiracy theorists — all around.

Published in Dawn, November 9th, 2014