NEW YORK — Oil prices plunged Tuesday in heavy trading amid unconfirmed reports of a major shift in Saudi Arabia's pricing strategy, a move that analysts said could spark a widespread price collapse.
Industry sources said Saudi Arabia, the world's largest oil exporter, has begun linking the prices of a large volume of its crude oil sales to spot prices, rather than follow OPEC's lead to hold prices at agreed upon levels.
On the New York Mercantile Exchange, the November delivery price of West Texas Intermediate, the key U.S. crude, fell 38 cents to close at $19.44 per 42-gallon barrel in its first major move in weeks.
The benchmark crude had been off as much as 42 cents a barrel before the close. Analysts predicted that there would be further selling when trading opens on Wednesday.
Among refined products traded on the exchange, the November delivery price for wholesale heating oil fell 1.11 cents a gallon to 54.82 cents. The November delivery price of wholesale unleaded gasoline fell 0.96 cent a gallon to 50.58 cents.
Analysts said the move was shocking because Saudi Arabia typically has abided by pricing policies established by the 13-nation Organization of Petroleum Exporting Countries.
While linking prices to the spot market is likely to make Saudi oil more competitive, it also could have a domino effect by forcing other producers to discount their oil to attract buyers, said Chris McCormack, an analyst with E. D.& F. Man International Inc.
"This is the first major crack in the (OPEC) price structure in 10 months," he said. "OPEC agreements to hold prices are defeated when a leader changes policy."
According to the reports, sources said the Saudis appear to have agreed to the new strategy in order to sell their alloted quota under the most recent OPEC pricing and production agreement.
That agreement limits Saudi Arabia to a national output quota of 4.34 million barrels a day under an overall OPEC output ceiling of 16.6 million barrels a day for the second half of the year.
Aramco Agrees to Pricing
Analysts said the move was probably politically motivated rather than an attempt to gain any further market share beyond the Saudi's OPEC quota.
They speculated that Saudi Arabia initiated the policy change to hurt the Iranian economy by forcing Iran to cut its prices to match.
Sources cited in the reports said that Saudi oil industry officials recently approached the four U.S. companies that make up the Arabian-American Oil Co.--Exxon Corp., Texaco Inc., Chevron Inc. and Mobil Corp.--in an attempt to develop a formula that would assure their steady contract purchases of Saudi oil.
The sources said the Aramco companies agreed to the spot-price linked arrangement following meetings with Saudi officials within the past three weeks.
Aramco officials could not be reached for comment about the arrangements.