Russian crude takes on Gulf

Gulf oil exporters will need to fight harder for market share in Asia and will suffer a drop in prices as a result of pressure from fresh supplies from Russia and eventually Iraq, an oil markets expert says.

Gulf oil exporters will need to fight harder for market share in Asia and will suffer a drop in prices as a result of pressure from fresh supplies from Russia and eventually Iraq, an oil markets expert said yesterday. The region's oil sellers are facing a raft of challenges in East Asia, their biggest market, as consumption in Japan decreases, new Russian crude establishes a foothold and Iraq looks to ramp up its production as much as five-fold in six years, said Jorge Montepeque, the global editorial director of market reports at Platts, a US-based oil pricing service used by exporters around the world.

The new challenges have the potential to reduce the Gulf producers' market share and the premium they have long been able to command for their oil in Asian markets, he said. "It's playing to their insecurities, they also see the Iraqis coming in," he said of Gulf exporters. "If you were to combine the rate of growth in China with the rate of contraction in Japan, you get a picture that maybe the rate of growth in north-east Asia is not that much." Japan, the biggest market for Abu Dhabi and a major importer of Gulf oil, will shrink steadily as economic growth slows and its population declines, he said, leading to battles for dwindling market share.

The most immediate threat is Russia, which completed an oil terminal and pipeline at the end of last year that allow it to move crude thousands of kilometres from its interior and export it from Kozmino, a port on its east coast near Vladivostock, which is close to Japan, South Korea and China. The port has the capacity to export 300,000 barrels per day (bpd), a figure that could rise to 1 million bpd with expansions in four years. Before the completion of the US$12 billion (Dh44.07bn) project, almost all Russian crude was exported west to Europe. The new supply, called Eastern Siberia Pacific Ocean (ESPO) crude, competes directly with Gulf crude, but is cheaper and takes three to four days to bring to market, instead of three to four weeks for Gulf oil. "The Asian buyers have been in an area where there's not a lot of local oil and the price reflects that cost of transport," Mr Montepeque said. "The Asian premium is going to be subjected to some downwards pressure - it's not going to disappear." Mr Montepeque said the ESPO oil costs about $0.75 less per barrel to transport, which appears insignificant but is crucial for refiners, who are today struggling to make a profit of $1 to $3 per barrel.

Asian refiners had already felt the effect of the ESPO crude on the market, said an oil trader based in Singapore who declined to be named. "Three or four months ago, no one had heard of ESPO crude," he said. "Now they are all talking about it." @Email:[e-mail]