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For Saudi Arabia, it is a philosophical issue that the black gold pouring out of its deserts should be treated as a tangible, physical commodity – not the paper plaything of traders on Wall Street hedging against the weak dollar. This thinking is at the heart of the Middle Eastern country’s decision last week to abandon its long alliance with West Texas Intermediate crude – the famous oil used by most global producers to price their exports to the US.
It is both a technical issue and a symbolic shift that strikes a blow to the domin-ance of the New York Mercan-tile Exchange, the world’s biggest centre of oil trading where the most popular products relate to WTI crude.
Saudi Arabia exports around 1.5m barrels per day of oil to the US, making it the second largest supplier after Canada, but its physical crude output is not actually traded on the exchange. This is done separately through contracts between countries and oil companies – but Saudi Arabia still bases its prices on the dominant benchmark, WTI.
For several years now, Saudi Arabia has argued that it has not been well-served by the New York Mercantile Exchange’s faith in this oil. Saudi Aramco, the national oil company, is fed up with being given a price for WTI crude that it claims fails to represent the global picture of supply and demand.
This year, the dominant crude oil’s volatility and disconnection from the fundamentals of the physical market went one step too far.
Frustration began to mount 18 months ago when the oil price hit record highs of $147 per barrel. This seemed to suggest that there was not enough oil being produced to meet demand. But Saudi Arabia complained that it could not shift the extra 500,000 barrels of oil per day it dumped on the market to try and meet this phantom shortage. Aramco blamed speculators that NYMEX had not kept under control.