Oil price war talk gains momentum as Iraq cuts prices

The market has been in a fragile state for months, and particularly vulnerable since last month’s Opec oil ministers’ meeting.

A labourer works at Nahr Bin Umar oil field, north of Basra, southeast of Baghdad. Essam Al-Sudani / Reuters

Iraq cut prices for its Asian and US crude oil customers on Tuesday, feeding the impression that there is a price war among major exporters afoot to maintain market share.

Last week, the Saudi state oil company, Aramco, also cut prices for its Asian and American customers, the fifth straight month of deeper discounts.

While some analysts said the price reductions by Iraq are partly for technical reasons, the oil market has been in a fragile state for months, and is particularly vulnerable since last month’s Opec oil ministers’ meeting, at which it was decided to leave production quotas unchanged despite clear signs of a glut in the world oil market.

Oil futures initially added to the previous day’s sharp losses, falling to new five-year lows, but later rallied to trade higher by afternoon in London.

North Sea Brent crude futures were up 45 cents at US$66.65 a barrel, having been as low as $66.19 during the day. As with other benchmark oil prices, Brent has been on a long slide and lost another $2.88 on Monday. It is now down more than 40 per cent since the summer high above $115 a barrel and seems to be firmly entrenched in a new trading range well below the average above $100 a barrel enjoyed for the previous four years.

On Tuesday, Iraq’s state oil marketing company, Somo, cut its official selling price for Basra Light crude to Asia for January delivery to $4 a barrel below the Dubai/Oman crude price average, compared to a $2.50 a barrel in December.

It also deepened the discount slightly for US customers, but raised it slightly for Europe.

Somo also published official selling prices for crude from Kirkuk, in the northern Kurdish province, for the first time since the Kurdish Regional Government and the central Iraq government reached a deal to smooth the way for more exports.

The deeper Iraq discounts can be partly explained by the fact that the crude from the southern fields is deteriorating in quality.

“The quality of the Basra crude stream has been decreasing so they have to offer a bigger discount now,” explains Robin Mills, the head of consulting at Manaar Energy. “The quality is also quite unstable, making buyers more cautious, so that means Iraqi crude of the same quality as Saudi crude will still have to trade a bit lower than the Saudi crude,” he added, speaking on the sidelines of the Platts Middle East oil conference in Dubai.

The discounting in general, however, is clearly part of an effort to defend market share. Last week, Saudi Aramco cut its prices to Asia and the US for the fifth month in a row, to their lowest levels since around 2002-03, according to data compiled by Reuters and Bloomberg news agencies.

Aramco cut Arab Light for Asian customers by $1.90 a barrel from December, to a discount of $2 per barrel to the Oman/Dubai benchmark. The US price was set at a premium of 90 cents a barrel to the Argus Sour Crude Index for January, down 70 cents from the previous month.

“Part of Iraq’s discount relates to the increasingly heavy crude they are selling as Basra Light,” Amrita Sen, the head of research at Energy Aspects, commented on the Platts conference sidelines.

But, she adds, it is the lighter crude types, such as Saudi, that are most under pressure from competition.

“With more barrels heading to Asia [from Latin America, former Soviet Union and West Africa sources], it’s a buyer’s market in Asia, and Middle Eastern producers will continue to face steep competition. The biggest competition is in light grades as that’s what’s been backed out of the US.”

Also on Tuesday, the brokerage house Jeffries downgraded its forecast for oil service companies, including the market leader Schlumberger, based on a cut in its forecast average for Brent for next year to $72 a barrel, from $90 previously.

Jeffries forecast that integrated oil companies earnings will decline by 30 per cent overall next year.

* additional reporting by LeAnne Graves and Dania Saadi