Saudi Arabia raise prices, makes cuts

Saudi Arabia is reportedly considering reduction in its crude export sales to its partners, by as much as seven percent, in a n attempt to show the first signs of compliance to the Opec deal. The news has been received well by the market, as it sent oil prices soaring by over 3 percent yesterday, after earlier fears of non-compliance from some smaller Opec players.

The whole idea of oil market rebalancing has not really kicked off yet. Many exports opined that it will not be possible unless Saudi Arabia makes everyone believe by tangible actions, that it is there to support the Opec deal in the longer run. Recall that Saudi Arabia had agreed to cut its output from record high levels by nearly 4 percent.

Now, the consideration of slashing exports by a higher magnitude does show seriousness on part of Saudi Arabia. Some believe that it also shows desperation, as non-Opec members remain apprehensive. "There remains a question mark over whether OPEC, with a long history of non-compliance, will actually follow through (with the cuts). Very few respondents expect full compliance," Singapore Exchange (SGX) had earlier said.

A recent survey by the Singapore Exchange reveals nearly 80 percent of the market sees oil price settling in the range of $50-60/bbl. This shows that the market still carries doubts over compliance by outside Opec members.

The Kingdoms flagship oil company, Aramco is believed to have reached its customers and informed about higher pricing for medium and lighter blends of crude. The intervention is intended to nudge along a re-balancing of the oil market, as prices will need to rise to encourage investment in new supplies, according to Saudi energy minister.

There are reports that Saudi Arabia might further delay the much-awaited Aramco IPO, and the recent attempts are aimed at improving the prospects of fetching a higher price. There is a view that Saudi Arabia would ideally want much higher oil price in return of making the Aramco production and other details public.

Goldman Sachs, on the other hand believes that even if oil production by Opec is reduced as promised, it will only moderately lift oil prices, given the expected supply response. Oil market rebalancing seems far away at the moment, but Saudi Arabias attempts are worth noticing. Pakistan should start getting slightly worried, as the lighter blends of Arab crude will start getting pricier from now on.