Saudi oil price cut driven by weak market

Saudi Arabia’s cut in official crude oil selling prices to Asia reflects weaker fundamentals of supply and demand, and does not imply a looming shift in OPEC+ policy or a fight for market share, analysts and industry sources said.

On Jan. 7, Saudi Arabia reduced the February official selling price (OSP) of its flagship Arab Light crude to Asia to the lowest level in 27 months. Asia is the kingdom’s larget market, buying the bulk of Saudi crude.

The cut raised concerns in the market about regional and global demand and led international benchmark Brent crude futures to drop by 3% on Jan. 8.
For some observers, the price adjustment revived memories of Saudi policy shifts in March 2020 and November 2014 when the kingdom cut prices and raised output in an attempt to boost its market share.

Analysts and industry sources said the cut this time brought the price of Saudi crude into line with that of other producers. Saudi Arabia had increased the price for five straight months to November 2023.

“We do not see the recent cut as indicative of such a looming shift, but instead largely keeping prices in line with other global grades that have reflected a softer oil market,” Helima Croft of RBC Capital Markets said.

The Saudi Energy Ministry did not respond to a request for comment.

The supply of crude has risen as increased output from non-OPEC countries such as Brazil and the United States has undermined the impact of production cuts by Saudi Arabia and allies in the Organization of the Petroleum Exporting Countries.

Within OPEC, the United Arab Emirates is ramping up exports of Abu Dhabi’s flagship Murban crude early in 2024, adding to increased output of other light sweet crude grades, including from fellow OPEC member Nigeria, as well as from the U.S. and Brazil and from Angola, which left OPEC at the start of the year.

Crude shipments from Iran, exempt from making OPEC output cuts, averaged 1 million barrels per day to Asia in December, treble the rate of the same month a year earlier, Kpler data show.

Gary Ross, CEO of Black Gold Investors and a veteran OPEC watcher, said the Saudi price cuts were in response to market changes, such as a drop in the premium of prompt supply to crude for delivery later, and weaker refining margins.
“They needed to improve competitiveness and are still higher priced,” he said.

Another OPEC watcher, who declined to be named because he was not authorised to speak publicly, said it was a mistake to see the price cut as indicative of a looming market share fight.

“The prices are back to normal levels from being overpriced,” he said.

NO POLICY SHIFT

OPEC+, which groups OPEC and allies, is making a further output cut in the first quarter of 2024, bringing the total curbs in place to almost 6 million bpd, and a panel of ministers meets on Feb. 1 to review the market.

An OPEC+ source said that meeting was not expected to change policy.
In March 2020, the OPEC+ pact briefly ended after Moscow refused to support deeper oil output cuts to cope with the impact on demand of COVID-19. Saudi Arabia in response to

Moscow’s refusal raised its output and cut its official selling prices.
Saudi price cuts then were more drastic than those on Jan. 7. For April 2020, Saudi Arabia lowered its OSP by $6.00 a barrel to Asia, sending global prices sliding, and a month later followed up with a further cut of $4.20.

The November 2014 Saudi policy shift in response to a shale oil boom in the United States led to a plunge in prices to below $50 a barrel and a two-year global supply glut that only ended after OPEC+ was formed in late 2016 and began to restrain output.

In the current context, OPEC delegates downplayed the issue of market share, citing the group’s view that non-OPEC supply growth will slow and members’ market share will recover as they maintain investment in production capacity.

As much of the world focuses on a transition to low-carbon energy, Western oil executives have said a failure to invest in exploration would lead to medium-term shortages.

Croft at RBC said it was hard to see how a return to a market share war would improve Saudi finances for 2024, as it would take months for lower prices to slow U.S. shale production. She also noted Saudi Arabia’s relations with Russia appeared to be on a sound footing.

“Saudi Arabia may opt to stay in a holding pattern, judging that it has done enough to support the market, and continue to seek more burden-sharing by other members,” she said.

“However, that does not mean Riyadh is going to open the floodgates and endure another sub-$50 stay.”