Saudi Oil Market Fight Shifts to U.S. as Asia Prices RiseBy Bloomberg NewsNov 4, 2014 5:49 AM ET
Saudi Arabia’s increase in crude prices for Asia signals the world’s biggest oil exporter is focusing its fight for market share on the U.S.
While Saudi Arabian Oil Co. boosted differentials for supplies to Asia next month after cutting some November prices to the lowest in almost six years, American buyers will get another month of reductions. The Middle East producer isn’t prepared to surrender sales in the U.S., where a shale boom has lifted output to the highest in more than 30 years, according to Idemitsu Kosan Co., Japan’s third-largest refiner, and Elements Capital Inc., a Tokyo-based hedge fund that focuses on energy.
Global oil prices slid into a bear market last month on speculation the biggest OPEC producers were discounting their crude to maintain market share, resisting calls to cut output amid slowing demand growth. West Texas Intermediate futures resumed the slide today, slumping to the lowest in three years, on signs the Saudis are prepared to go even lower to shore up U.S. demand.
“Asia needs to buy the crude from Saudi Arabia regardless of price fluctuations,” Ken Hasegawa, an energy trading manager at Newedge Group in Tokyo, said by phone. “On the other side of the world, they’re trying to expand their share of the U.S. market and lowered prices.”
WTI crude futures fell as much as 3.7 percent to $75.84 a barrel, the weakest since Oct. 4, 2011, on the New York Mercantile Exchange. Brent declined as much 3.2 percent to $82.08 on the London-based ICE Futures Europe exchange.
Saudi Arabia can count on sales to Asia for revenues as most customers hold long-term contracts that require them to take deliveries, Hasegawa said. The country shipped 68 percent of its crude exports to Asia and 19 percent to the U.S. last year, data from the U.S. Energy Information Administration show.
Asian Demand
The biggest oil consumers in Asia including China, Japan, India andSouth Korea count Saudi Arabia as their largest supplier. The region accounts for about one-third of global oil demand, according to the International Energy Agency in Paris.
“Asia’s demand for Saudi crude has been relatively stable, so Saudi Arabia can raise prices slightly to improve their profits,” Gao Jian, an oil analyst with Shandong-based consultant SCI International, said by phone. “Meanwhile, they have to cut their prices to the U.S. further so as to be competitive against crude produced domestically.”
Arab Light, the biggest Saudi crude stream, will sell in Asia next month at 10 cents a barrel below the average of Oman and Dubai grades, up from a $1.05 discount for November, Aramco’s statement showed. That’s still attractive to refiners given current product crack spreads, according to Setoh Shohei, a former crude trader who is currently a Tokyo-based manager at Japan Biofuels Supply LLP, a joint venture of Japanese refiners. He estimated its value at a premium of 45 cents.
Market Share
“The Saudis probably adjusted prices for the U.S. market to compete with shale oil, their big rival,” Sagishima Toshiaki, an official in the Treasury department at Idemitsu Kosan, said in Tokyo. “Asia is a premium market for them.”
While the increase in Saudi prices to Asia was higher than expected, it shouldn’t be viewed as a reluctance to keep market share, according to Bernard Leung, a oil strategist for Bloomberg First Word who traded crude for 15 years.
Saudi Arabia’s share in China increased to 17.2 percent in September from 15.7 percent a month earlier, he said. A rise in freight rates from the Persian Gulf to Asia indicates that demand is improving, according to Leung.
The rise in official selling prices will be followed by other Middle East producers, which may keep supplies from Saudi Arabia competitive, he said.
State-run National Iranian Oil Co. may raise the December official selling prices of its crude to Asia for the first time in five months, according to a quarterly formula based on Saudi prices that the Tehran-based company has used previously.
Shale Boom
“The Saudis didn’t lower price differentials for Asia because they know well that they won’t lose the Asian market,” Takashi Hayashida, the chief executive officer of Elements Capital, said by phone.
The U.S. is pumping oil at the fastest pace in more than three decades as a combination of horizontal drilling and hydraulic fracturing, or fracking, has unlocked supplies from shale formations in the central U.S., including the Bakken in North Dakota and the Eagle Ford in Texas.
Production expanded to 8.97 million barrels a day in the week ended Oct. 24, according to the EIA, the Energy Department’s statistical arm. That’s the most in data going back to Jan. 14, 1983.
“It’s now a game of chicken between OPEC members and the U.S. to fight for market share,” in the world’s biggest oil-consuming nation, Will Yun, a commodities analyst at Hyundai Futures Co. in Seoul, said by phone.
https://www.bloomberg.com/news/2014-11-04/saudi-oil-market-fight-shifting-to-u-s-as-asia-prices-increased.html