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Saudi Arabia's quantitative oil easing

The kingdom doesn't play the spot market, so its pledge to keep pumping can only do so much

Saudi Arabia wants the oil price to fall. This policy, handed down by King Abdullah in March, has not changed. Brent above $100 a barrel is bad for business, threatening the economic health of its biggest customers. The kingdom plays the long game and knows that keeping oil affordable is in its own interests.

It is a markedly different strategy from the one espoused by many other exporters, including rivals within Opec, like Iran, which on 18 September said prices were too high. Others seem to take a similar view. Canada's central bank governor said in a recent speech that high commodity prices were "unambiguously good" for his country.

On the same day that Iran was calling for higher oil prices, however, Saudi Arabia pledged once again to keep its oil supplies high, at around 10 million barrels a day. The market duly responded, with Brent shedding about $4/b. On 20 September it was down to around $108/b.

But extra Saudi supply and regular comments by its officials designed to drive down oil prices have to be understood for what they are. As a senior Saudi ministry told Petroleum Economist in Dubai, the kingdom is determined to meet whatever demands for its oil its customers make. What it is not doing, however, is discounting oil or offering it to the spot market.

Saudi Arabia sees its oil supply less in terms of a fungible market and more as a virtual pipeline network to its clients. Oil production that is not needed by its customers may end up in storage tanks "helping to build global stocks" but it won't end up in the spot market. The message is simple: if buyers want more Saudi oil, it is available and they are welcome to buy it. "Our long-term relationships are more important than selling in the spot market," said the ministry source.

So its latest effort to balance the market and keep it well supplied "both key phrases in the present strategy" is unlikely to be decisive, on its own, in driving prices down.

The policy is subtler: to change sentiment in the market. "From about 2004 to 2008 the market was obsessed with the idea of peak oil," said the senior ministry figure. "After 2008, it has been obsessed with spare capacity." Thwarting that perception, by promising whatever oil customers want, is part of the plan.

But Saudi policy has a flip side to it, too. Dips in its supplies do not reflect a change in strategy. They reflect a change in the needs of the kingdom's customers. If Saudi Arabia doesn't feel the pull on its crude it doesn't sell it, said the official.

China's economic problems, the Eurozone's woes, falling oil demand and rising production from non-Opec suppliers "much of which does end up in the spot market" may send oil prices tumbling down a hill in the coming months. Saudi Arabia will gladly help push them. And like the Federal Reserve's promise to keep pumping dollars until the US economy recovers, the kingdom is determined to keep pumping crude, keep building stocks and keep talking down the market until prices are in a healthier range.

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