US and Saudi Arabia discussed secret oil swap deal

Deal to circumvent OPEC and oil markets, using European refiners.

Talks demonstrate urgency of US need to reduce oil price. GETTY IMAGES
Talks demonstrate urgency of US need to reduce oil price. GETTY IMAGES

Reuters Africa reports that in advance of the 8 June meeting of the Organization of the Exporting Countries (OPEC) the US and Saudi held secret talks with a view to agreeing an oil swap designed to lower US prices at the pump.

The news comes as reports filtered onto markets that US crude reserve is declining, further increasing oil prices most economists agree are already high enough to weaken prospects of global economic recovery.

The Reuters support states the US and Saudi were set to surprise oil markets with a deal that would see the US exchanging some of it's strategic petroluem reserve (SPR) of light sweet crude for larger quantites of Saudi's heavy crude, via European refiners missing Libya's supply.

But it did not make it past the drawing board, four sources familiar with the talks confirmed. The sources disagree on which country proposed the plan. Two said it fell apart because Riyadh was not willing to subsidize European or U.S. customers by discounting its crude prices below market value.

Despite failing, the deal demonstrates the willingness of the US administration to find creative ways of lowering prices, and Saudi Arabia's receptiveness to solutions to high prices that are acting as a brake on economic recovery.

The news also further reduces OPEC's standing, emphasising the more marginal role a producers' cartel takes when demand and prices are high.

The news will go down badly with OPEC Secretary General Abdullah el-Badri. Speaking at the Reuters World Energy Summit yesterday, Badri said "Strategic reserves should be kept for their purpose and not used as a weapon against OPEC". 

Saudi begun increasing output in advance of June's OPEC meeting and has pledged to increase supply to global markets by 10 million bpd.

Concerns remain over a supply shortage later in the year, with the latest OPEC market report anticipating a tightening beyween suipply and demand.


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