2024-01-17 14:44:33
Analysts and sources from the oil sector considered that Saudi Arabia’s reduction in official selling prices for crude oil to Asia reflects weak fundamentals of supply and demand.
According to the sources, this does not indicate an imminent shift in the policy of the OPEC+ group or a struggle for market share.
On January 7, Saudi Arabia reduced the official selling price of Arab Light crude for February to Asia to the lowest level in 27 months.
Asia is the largest market for the Kingdom because it buys the largest amount of Saudi crude.
The reduction raised concerns in the market regarding demand in the region and the world, and led to a decline in Brent crude futures by three percent on January 8.
For some observers, the price adjustment revived memories of the Saudi policy shift in March 2020 and November 2014, when the Kingdom lowered prices and raised production in an attempt to increase its market share.
Analysts and sources in the sector stated that the reduction this time brought the price of Saudi crude in line with the price of its counterpart from other producers. Saudi Arabia continued to raise the price for five consecutive months until November 2023.
“We do not see the recent cut as an indication of an imminent shift, but on the other hand, it keeps prices largely in line with other global crude types, reflecting the weakness of the oil market,” said Helima Croft of RBC Capital Markets.
The Saudi Ministry of Energy did not respond to a request for comment.
Crude supplies rose because increased production from countries that are not members of the Organization of the Petroleum Exporting Countries (OPEC), such as Brazil and the United States, limited the impact of Saudi Arabia and its allies in OPEC reducing production.
The OPEC member UAE has been working to increase exports of the main Murban crude to Abu Dhabi since the beginning of 2024, which has boosted excess production of other types of light, low-sulphur crude from countries including OPEC member Nigeria, and from the United States, Brazil and Angola, which withdrew from OPEC at the beginning of the year.
Kpler data shows that crude shipments from Iran, which is exempt from OPEC production cuts, averaged one million barrels per day to Asia in December, three times the rate of the same month the previous year.
Gary Ross, CEO of Black Gold Investors, a veteran OPEC watcher, said Saudi Arabia’s price cuts were in response to market changes such as a lower spot premium for crude for later delivery and weak refining margins.
“They need to improve competitiveness,” he added.
Another OPEC observer, who requested that his name not be published because he is not authorized to speak publicly, said that it was a mistake to consider the price cuts an indication of an imminent struggle for market shares.
He said that prices returned to their normal levels following they were exaggerated.
No shift in policy
The OPEC+ alliance, which includes OPEC and its allies, will conduct an additional production cut in the first quarter of 2024, bringing the total amount of reduction to regarding six million barrels per day, and a committee of ministers will meet on February 1 to review the market.
An OPEC+ source said the meeting is not expected to change policy.
The OPEC+ agreement ended in March 2020 following Moscow refused to support further cuts in oil production to deal with the impact of Covid-19 on demand. Saudi Arabia responded to Russia’s refusal by increasing its production and reducing official selling prices.
Saudi Arabia reduced prices at that time more than what happened on January 7, so it reduced the official selling price to Asia in April 2020 by six dollars per barrel, which led to a decline in global prices. The price cut increased by $4.20 per barrel in May.
A shift in Saudi policy in November 2014 in response to a boom in US shale oil production led to prices falling below $50 per barrel and a two-year global supply glut, which did not end until OPEC+ was formed in late 2016 and began to cut production.
OPEC delegates downplayed the importance of the market share issue, citing the organization’s view that the growth of supply from non-OPEC member countries will slow and that members’ market share will recover as investment in production capacity continues.
With most of the world focusing on switching to low-carbon energy, Western oil executives said that failure to invest in exploration will lead to an oil shortage in the medium term.
Croft said it is difficult to see how a return to the market share war will improve Saudi Arabia’s financial conditions in 2024 because it will need to lower prices over a period of months to slow US production of shale crude. She also indicated that Saudi Arabia’s relations with Russia appear to be good.
She added, “Saudi Arabia may choose to remain steadfast given that it has done enough to support the market and will continue to seek to increase burden sharing with other members.”
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