Saudis Cut Crude Prices to U.S. in December Amid Shale Boom

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Saudi Arabia Oil Production
A flame from a Saudi Aramco oil installation burns brightly during sunset in the Saudi Arabian desert near the oil-rich area Al-Khurais, 160 kms east of the capital Riyadh. Persian Gulf oil producers such as Saudi Arabia sell most of their crude under long-term contracts to refiners. Photographer: Marwan Naamani/AFP/Getty Images

Saudi Arabian Oil Co. lowered the cost of its crude to the U.S., where production is the highest in three decades, deepening a selloff that sent prices to the lowest in three years.

The state-owned producer, known as Saudi Aramco, lowered the premium for Arab Light relative to U.S. Gulf Coast benchmarks by 45 cents a barrel to the smallest since December. medium and heavy grades were also down 45 cents and extra light oil 50 cents. Aramco increased the cost to Asia and Europe.

Swelling supplies from producers outside OPEC drove oil prices into a bear market last month as global demand growth slowed. Middle Eastern producers are increasingly competing with cargoes from Latin America, North Africa and Russia for buyers, as well as with U.S. production that has jumped 54 percent in the past three years.

“The Saudi move speaks to them wanting to preserve market share in the U.S., where it has slipped recently,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said yesterday by phone. “It looks like the Saudis are comfortable with prices and demand.”

West Texas Intermediate, the U.S. benchmark, tumbled $1.59 to close at $77.19 a barrel on the New York Mercantile Exchange. It was the lowest settlement since Oct. 4, 2011. Brent, the global benchmark, dropped $1.96 to end the session at $82.82 a barrel on the ICE Futures Europe exchange in London. It was the lowest close for the European benchmark oil since Oct. 21, 2010.

Market Reaction

“The market is reacting as though Saudi Arabia is going to flood the Gulf and is going to compete with shale production,” Michael Hiley, head of energy OTC at LPS Partners Inc. in New York, said yesterday.

Saudi Aramco surprised traders last month when it trimmed crude levels, known as official selling prices or OSPs, to six-year lows for buyers in Asia, a step interpreted as a shift in the stance of OPEC’s biggest producer to defending market share from supporting prices. Iraq’s Oil Minister Adel Abdul Mahdi said Oct. 31 that members of the Organization of Petroleum Exporting Countries are engaged in a “price war” as surplus supplies spur them to offer discounts.

Persian Gulf oil producers such as Saudi Arabia sell most of their crude under long-term contracts to refiners. Most of the region’s state oil companies price their oil at a premium or discount to a benchmark. Those differentials determine the price buyers will pay for crude imports. Iran and Iraq followed Saudi differential cuts last month.

Refinery Rates

Refineries in the U.S. are operating at the lowest rate since March, Energy Information Administration data show. Margins for making fuel from Mars Blend crude on the Gulf Coast sank 47 percent in early October, while profits for Mexican Maya declined 41 percent. Imports from Saudi Arabia dropped to 609,000 barrels a day in the week ended Oct. 3, a four-year low.

“U.S. markets have been weaker given the refinery turnarounds, and hence the cuts,” Amrita Sen, chief oil market analyst at Energy Aspects in London, said yesterday. “Asia has firmed, and hence they raised prices there.”

For December, Aramco will sell Arab Light to clients in Asia for 10 cents less than Middle East benchmarks, the company said yesterday in an e-mailed statement. The November discount was $1.05.

“The Asian price is most the important one because that’s their only growing market,” Mike Wittner, head of oil market research at Societe Generale SA in New York, said yesterday. There’s no growth for Saudi Arabia in the U.S. market, or Europe for that matter, he said.

Flooded Market

Three decades ago, Saudi Arabia cut production by almost two-thirds trying to stem a drop in global prices. The strategy backfired as new supply from areas like the North Sea flooded the market, pushing prices down by about half to $10 a barrel in 1986, ushering in an era of budget deficits in the country most endowed with oil wealth. It took the 1990 Iraqi invasion of Kuwait to propel Saudi production past 8 million barrels a day again.

The country is now seeking to maintain sales above that level to sustain its position in the market, Fereidun Fesharaki, chairman of Singapore-based consultant FACTS Global Energy, said yesterday. OPEC is scheduled to meet Nov. 27 in Vienna to discuss production levels.

Saudi Oil Minister Ali Al-Naimi will attend energy events in Venezuela and Mexico until next week, according to two people with direct knowledge of his planned movements who declined to be identified because they’re not authorized to speak to the media.

The world’s largest exporter is pumping oil at close to the fastest pace in more than two decades. Production at about 9.7 million barrels a day on average this year is down from the 10 million barrel-a-day peak in September 2013, according to production estimates compiled by Bloomberg.

“They always say they are responding to market conditions and they appear to be doing that now,” said Wittner. “They sometimes may do a little something to encourage demand in a specific market, which may be the case now.”

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