Top-level talks between big oil exporters are a bit like the mating habits of porcupines: If they're to avoid getting hurt, both parties have to proceed with extreme caution.
So don't be surprised if nothing is consummated from Tuesday's meeting between Saudi Arabia's and Russia's oil ministers. The talks will take place in Doha and also include another prickly customer, Venezuela, a person familiar with the matter told Bloomberg News.
The subject of conversation between oil exporters is usually production boosts or cuts. But behind that there's usually a shadow discussion about market share -- and on that front neither party has good reason to budge.
Russia supplied more oil to China than Saudi Arabia did in four months of 2015. At the start of 2011, Russian producers had as little as 3.7 percent of the Chinese market against a 19 percent share for their Saudi rivals. Since then, Transneft has completed its ESPO pipeline to bring Siberian oil to the port of Kozmino on the Sea of Japan east of Vladivostok. In December, it had a 14 percent share, ahead of Saudi Arabia's 13 percent by some 2.9 million barrels.
Other producers are ramping up their activity. Iraq and Oman, which had respective 5.3 percent and 7.1 percent shares through 2011, both came in with 9.6 percent of the Chinese market last year. Then there's Iran. While the country still sold crude to China through almost four years of sanctions related to its nuclear energy program, the resumption of wider trade and investment will increase output by as much as 1 million barrels a day over the coming months.
The problem with all this jockeying for position is that China, the world's second-biggest oil consumer after the U.S., doesn't appear to have nearly as much appetite for foreign crude as its suppliers would hope. Back in 2011, the early ripples from the U.S. shale oil revolution started putting the price of West Texas Intermediate crude out of line with Brent, the benchmark that swings most easily between the Asian and Atlantic basins. The disconnect had a simple cause: U.S. wells were producing more oil than the market could absorb, and prices fell as a result.
That dynamic has diminished in recent years, not least because the U.S. is now able to export its own crude for the first time since the 1970s. But the pricing discontinuities haven't gone away -- they've just moved:
Such a discount for the Asian-focused Oman-Dubai benchmark to Brent indicates that Asia simply doesn't have the appetite for all the crude being sent its way. Such pricing anomalies typically iron themselves out, but a certain amount of stalemate is baked in the cake this time. The Siberian-Pacific pipeline will struggle to export its crude anywhere except Asia, and in any case the precipitous slump in the ruble has driven down Russia's production costs.
Meanwhile, Saudi Arabia is making its dedication to Asia clear with plays for local downstream oil assets. Chinese officials, for their part, have pitched a Hong Kong listing for the mega-IPO of state-owned Aramco, people familiar with the matter told Bloomberg News.
With Russia having little incentive to cut its supplies to Asia, and Saudi having little to cut them to the world, don't hold your breath for any deal in Doha.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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