OIL PRICES REDUCTION
Saudi Arabia cut October selling prices this week to customers in Asia, Europe and the US, in a sign that Opec's largest producer is unlikely to curb production even amid an excess of crude oil supply.
The state-owned oil company Aramco reduced prices for its main oil export grade – Arab Light – to Asia by $1.70 a barrel in October from September, to a discount of 5 cents a barrel to the Oman-Dubai benchmark.
Prices to the Mediterranean fell by 95 cents a barrel, to a discount of $3.20 against the Brent benchmark. The same grade going to the US and northwest Europe declined by 40 and 70 cents respectively to the Argus Sour Crude Index and Brent benchmarks.
All four regions saw prices reach levels last seen in November 2010. Heavier grades also posted decreases.
"While the cuts were widely expected, the magnitude took a few in the market by surprise," said Amrita Sen, at London-based consultancy Energy Aspects.
"For the Saudis, market share has really become an issue over the last year, so this is a signal that they are not just going to cut production because they have done so in the last few years," she added.
Saudi Arabia has lost significant market share – particularly in Asia and the Mediterranean – to Iraq and Iran, both of which have been heavily discounting their crude. It is also increasingly competing with Kuwait and the UAE.
Although some analysts have said the lowering of prices for the US has been in response to growing shale oil production, others believe it is rather to do with low cost Opec producers seeking to expand their footing in the region.
"The overall reductions indicate they [Saudi Arabia] see a slack market and weak refining margins, meaning they have to discount more – particularly in Asia – to ensure their crude is taken," said Gareth Lewis-Davies at BNP Paribas.
ICE October Brent, which hit $115 a barrel in mid-June, fell close to the $100 a barrel mark this week amid an oil glut.
Geopolitical tensions, from Libya to Iraq, have failed to disrupt production meaningfully. Moreover, excess supplies in the Atlantic Basin and North Sea, amid weak European demand, have only compounded the effect of North American production increases.
Market participants believe Saudi Arabia will cut production, influence prices and balance the market in times of oversupply, particularly since signalling its preferred price range of about $100 a barrel.
Production stands at close to 10m barrels a day, with 7m-8m b/d allocated for export.
As yet unhindered global production, combined with Saudi Arabia's reluctance to cut output, bar seasonal fluctuations, could mean the price of oil falls further.
However, Abhishek Deshpande, analyst at Natixis, said the country was too reliant on oil revenues not to step in. "A greater number of exports at lower and lower prices doesn't make sense."
Even so, Mr Lewis-Davies added that when Saudi Arabia had sought to cut production in the past, regaining market share without disturbing the price had been problematic. There are also questions as to how much of the Gulf nation will be willing to lower output, especially if other Opec members do not follow suit.
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