Saudi Arabia deepens Asian discounts to maintain market share

Brent crude and West Texas Intermediate were both slightly down, but by nowhere near the levels of last week, during midday trading on Thursday. Rick Wilking / Reuters

Oil prices have fallen nearly 40 per cent since June, yet Saudi Arabia deepened the discounts to Asia to preserve market share.

The move comes after last week's Opec decision, which the Saudis favoured, to continue producing a total of 30 million barrels per day.

This marks a reversal from the kingdom’s pricing tactic last month, when it said it would increase the relative price of crude supplies to Asia. It also decreased the premium to clients in America in what was viewed as an attempt to squeeze US shale producers.

Saudi Aramco had been offering the crude grade at 10 cents a barrel below Oman and Dubai grades this month, up from a discount of $1.05.

“Opec’s decision to maintain production at current levels is a clear signal to let the market find its own level. Now the market will be watching carefully to see at which price level the market comes back into balance,” Christopher Fix, the chief executive of Dubai Mercantile Exchange (DME), has said.

The oil market was thrown into some confusion yesterday when Saudi Aramco, the state oil company, recalled an email it sent earlier in the day, and which announced a sharp drop in its January discount for Asia.

The email said Aramco had cut its January price for its Arab Light grade for Asian customers by $1.90 a barrel from December to a discount of $2 a barrel to the Oman/Dubai average.

Saudi Aramco sent a follow-up email after the recall confirming it had sharply cut January official selling oil prices for Asia and the US.

Aramco said that the recalled message referred to a repeated message.

“Some of you may have received our official selling price [OSP] notification email twice today due to a technical glitch. We recalled one of the emails, both of which were the same, to avoid duplication.”

Crude oil prices tanked last week to below $70 a barrel, but have since stabilised. Oman crude oil prices also weakened to their lowest in four years, plunging by $9.50 a barrel.

In trading yesterday afternoon, Brent crude and West Texas Intermediate were both slightly down, but by nowhere near the levels of last week.

Brent was down 19 cents to $69.73, and WTI was down 40 cents to $66.48.

Markets could be going through a temporary reprieve after “bearish exhaustion”, Stephen Schork, an oil markets analyst in Pennsylvania, told Reuters.

“By most estimates, the economics on oil production are below break-even,” Mr Schork said, referring to North American capital expenditure and the fiscal budgets of Opec countries.

The fight over crude market share could cause further problems for countries already deemed very fragile.

Nigeria, Africa’s largest crude oil producer is one of the hardest hit by the crude tug of war. The dollar bonds of Nigeria, with nearly 70 per cent of these bonds deriving from oil export revenue, were the worst performer after Ukraine in emerging markets. The West African country was forced to devalue its currency last week, with the naira dropping 11 per cent against the dollar.

Nigeria depends on the hydrocarbon sector for about 35 per cent of its GDP, and petroleum exports represent more than 90 per cent of total exports revenue.

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