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OPEC drives Saudi supply cuts

China Daily | Updated: 2016-12-03 07:31

The effect of OPEC's deal to reduce crude output starting next month is already being felt in Saudi Arabia, the world's biggest oil market.

OPEC's biggest producer - Saudi Arabia is also the world's biggest crude exporter - is planning to curb the additional crude it offers to Asia customers on top of its regular scheduled supply under long-term contracts, people with knowledge of the matter said.

The cut in such spot cargo offerings in January is part of a strategy to implement the output reduction deal reached in Vienna earlier this week, they said, asking not to be identified because the information is confidential.

The plan shows one way through which producers will pass on OPEC's first output cut in eight years to users of their supply. It's also a sign of the shift in policy of Saudi Arabia, which had previously led the Organization of the Petroleum Exporting Countries, in a strategy of keeping taps open to defend market share.

The deal between producers this week is an effort to shrink a global glut that has dragged down benchmark prices more than 50 percent below their 2014 highs.

"This sends a signal to customers in the Asia Pacific that you are going to see tighter supplies, and this very likely will prompt customers to expand or diversify their crude oil supply sources," said John Driscoll, the chief strategist at JTD Energy Services Pte, who has spent more than 30 years trading crude and petroleum in Singapore.

The OPEC "agreement is a significant and strategic shift for the Saudis from their market-share driven policy for the last two years", Driscoll said.

Saudi Arabian Oil Co, or Saudi Aramco as the state-run company is known, sells the majority of its oil via long-term contracts to refiners. Buyers can nominate to buy more or less supplies within a 10 percent contract tolerance each month, and purchase incremental spot supplies on top of regular volumes.

If the cut in spot supplies is not sufficient to bring overall output under Saudi Arabia's new target level, Aramco can also supply less oil to term customers within the tolerance level of scheduled volume, the people said. That decision would also be based on how much supplies customers seek for January after official selling prices for the month are released, they said.


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