Saudi Arabia Seen Widening Asia Oil Discount on Shale Surge

Updated on
Saudi Arabian Oil Co.
A general view shows the Saudi Aramco oil facility in Dammam city, 450 kms east of the Saudi capital Riyadh. State-run Saudi Arabian Oil Co. is offering the grade at 10 cents a barrel below Oman and Dubai this month, according to Nov. 3 statement from the company known as Saudi Aramco. Photographer: Hassan Ammar/AFP/Getty Images

Saudi Arabia will probably deepen discounts for crude supplies to Asia after leading OPEC to maintain the group’s output target amid a global battle for market share.

The world’s biggest oil exporter will announce January official selling prices to buyers in Asia this week, after lifting its Arab Light grade from the lowest level in almost six years a month earlier. The largest producer in the Organization of Petroleum Exporting Countries may offer bigger discounts, according to 12 of 13 respondents in a Bloomberg News survey of traders. One participant forecast differentials to be unchanged.

Saudi Arabia is discounting its crude as OPEC’s decision to maintain production quotas prompts speculation the group is prepared to let prices fall to defend its market share against more expensive U.S. shale output. Benchmark futures contracts have collapsed almost 40 percent from a June peak as competition between suppliers increased amid slowing demand.

“There’s no question that the Saudis want to maintain market share,” Victor Shum, a Singapore-based vice president at IHS Inc., an industry consultant, said by phone yesterday. “They could cut prices to make them competitive in an environment that still seems to be under a lot of downward pressure.”

Arab Light, the largest Saudi oil stream, will sell in Asia next month at $2 a barrel below the average of Oman and Dubai grades, Masahi Nakayama, the general manager of the crude and tanker department at Cosmo Oil Co., a Japanese refiner, said last week.

Price Cuts

State-run Saudi Arabian Oil Co. is offering the grade at 10 cents a barrel below Oman and Dubai this month, according to Nov. 3 statement from the company known as Saudi Aramco. That’s up from a discount of $1.05 for November, the widest since December 2008.

Front-month cargoes of Dubai crude cost $1.48 a barrel less than those for later deliveries on Nov. 19, the biggest discount since November 2008, data compiled by Bloomberg show. This market structure, called contango, influences the way Aramco sets its oil prices and may prompt the reductions, according to Nakayama.

“If the discount for Arabian Light crude surpasses $1, it will be quite unusual for January when oil demand for heating peaks in the Northern Hemisphere,” said Setoh Shohei, a Tokyo-based manager at Japan Biofuels Supply LLP, a joint venture of the nation’s refiners, and a former crude trader.

Global Oversupply

OPEC last week signaled it won’t adjust supply to influence prices, instead preferring to maintain market share amid the unprecedented U.S. shale boom. The 12-member group, which supplies about 40 percent of the world’s oil, kept its collective quota at 30 million barrels a day, a target first set in January 2012. The global oversupply will almost double to 1.3 million a day in the first half of next year, Citigroup Inc. said in a Nov. 27 report.

Saudi Arabian Oil Minister Ali Al-Naimi, who resisted calls from some OPEC members to cut supplies, has expressed concern behind closed doors about rising U.S. shale output, according to Iranian Oil Minister Bijan Namdar Zanganeh.

“If the Saudis start selling too aggressively now, it may create a discounting battle among OPEC countries and that could end up causing political unrest in some places,” said Takashi Hayashida, the chief executive officer of Elements Capital Inc., a Tokyo-based hedge fund that focuses on energy. “That’s not what Saudi Arabia wants, as political instability hinders growth in oil demand. I expect the cut won’t be too drastic this time with consideration for this concern.”

Market Share

Surging U.S. shale production has reduced the nation’s imports, boosting supplies available in Asia. Cargoes from North America to Russia and Latin America to Africa are finding buyers in the region amid the surplus in international markets.

Brent futures, the benchmark grade for more than half the world’s oil, added 0.4 percent to $70.23 a barrel on the London-based ICE Futures Europe exchange at 3:32 p.m. Singapore time. U.S. marker West Texas Intermediate was at $67.83 in electronic trading on the New York Mercantile Exchange.

OPEC pumped 30.56 million barrels a day in November, exceeding its target for a sixth straight month, a separate Bloomberg survey of oil companies, producers and analysts showed. The group is next scheduled to meet on June 5.

Saudi Arabia produced an estimated 9.7 million barrels a day last month, data compiled by Bloomberg show. In the U.S., output increased to 9.08 million barrels a day through Nov. 21, the most in weekly records that started in January 1983, according to the Energy Information Administration.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE