On Wednesday, Saudi Aramco the state oil company of the world’s top oil exporter, said that effective from January, all its crude sales into the United States would be priced off the Argus sour crude index.

Aramco had previously used West Texas Intermediate prices published by Platts, a unit of McGraw Hill, as its price marker, Argus said. These prices are closely linked with the US light sweet futures contracts traded on NYMEX — the world’s main forum for often volatile and speculative oil futures trading.

It has gradually become clear that this arrangement is costing Saudi exporters dear, analysts say, although some question whether the alternative has enough liquidity yet.

“The Saudis are figuring out they are losing too much money on the volatility of the WTI contract,” said Carl Larry, president of Oil Outlooks and Opinions. “There are too many speculators pushing the market around and it’s becoming too hard to keep track of the real value of crude.”

In September, Saudi Arabian Oil Minister Ali Al Naimi said he favoured tighter oil market regulation to curb speculation and reduce price volatility.

“Opec has long bemoaned the fluctuation of oil prices and speculator influence but it has largely fallen on deaf ears,” Larry said.

“If we subtracted the net length of speculators on any given day, the drop would be worth at least $20 (per barrel of crude).” The switch to the Argus sour crude index also allows the Saudis to insulate themselves from the gyrations in US oil futures caused by trading tactics that reflect dollar movements, analysts said.  “By switching...they are trying to maintain a neutral stance with the US dollar and keep value for their imports,” Larry said.

The weak dollar has been a major reason for oil’s rally of more than 50 per cent so far in 2009.

Quality Differences

The problem with using a WTI linked price is that the oil is for delivery into a land locked storage terminal at Cushing, Oklahoma.

The crude stored at this facility is light and sweet — meaning it has lower sulphur content and is highly suitable for refining into gasoline — while Saudi Arabia exports mostly medium-sour crudes into the United States.

“The variation in the specifications of the crudes is already a big disconnect, but we have all gone along with it because we want to make money, not rock the boat,” said a senior crude trader.

“But when you start to lose money, or find it increasingly more difficult to make it or call value on actual physical oil then you start looking for alternatives.” WTI was initially used as a marker for the domestic market in the United States where refiners paid a premium for crudes which offered a higher yield of products like heating oil and gasoline. Now this contract has become a global pricing marker, although sour crude output far outweighs light sweet crude supply.

“The pricing of Saudi Arabia’s crude exports to the United States has long had to deal with the interrelated difficulties of pricing a medium sour slate against a light sweet marker,” said PFC Energy in a report published on Wednesday. “Storage issues at Cushing — and the lack of transport outlets to the US Gulf Coast — have seen episodes of divergence in pricing trends between the US marker and Gulf Coast produced crudes.”

US sour crude still uses WTI as a price reference. Argus says that its sour index “responds quickly to global market dynamics” if the US marker becomes disclocated from world crude prices.

Others to Switch?

Analysts said it was still to early to judge how other Middle East sour crude producers would react to Saudi Arabia’s decision to switch price markers.

“WTI has long been regarded as a flawed benchmark — but it’s still the most liquid contract there is,” said Olivier Jakob of Petromatrix.

“It would be nice to have an alternative but we are not there yet.”

Liquidity could influence other regional sour crude producers to make the switch.“Knowing the financial markets, I think that if there is even a slight hint of liquidity in the WTI contract fading, the Argus index could have a paper contract on the CME/NYMEX soon,” Larry said. “If there is enough support from the Saudis for the contract others will follow out of necessity and liquidity.”