Saudi Arabia claws back global market share with oil output push

LONDON — When Saudi Arabia's Oil Minister Ali Al Naimi says he does not want the kingdom to lose market share anymore, he really means it.

Iraq, Venezuela, Russia and Kazakhstan all saw their oil partially replaced by Saudi crude in Asia, the United States and even Europe, with its lackluster demand, as traders said the kingdom offered customers more oil, and more cheaply.

Supplies from the leading producer of the Organisation of Petroleum Exporting Countries (OPEC) are notoriously difficult to track as they reach customers under confidential direct deals rather than via the spot market. 

But an indirect confirmation of rising deliveries came on Sunday from Naimi himself.

The veteran minister, who carefully chooses his words and figures in his speeches, said the kingdom was now pumping around 10 million barrels per day (bpd), near an all-time high and some 350,000bpd above the figure Saudi Arabia gave to OPEC for its February output.

And to stress the message, Naimi said the kingdom had the ability to increase if customers asked for more.

Gary Ross, the founder and executive chairman of PIRA, the first consultancy to predict Saudi oil output rising to 10 million bpd in March, said PIRA's research and conversations with customers showed additional crude would be delivered to Asia and the United States.

In Asia, some Chinese refineries switched from using West African barrels to the Saudi Arab Light grade. In the United States, some customers increased their use of Saudi oil because of very competitive pricing.

Also contributing to the rise in Saudi supplies were much lower loadings of Iraqi crude because of bad weather in February, Ross remarked.

"The Saudis have said they are ready to increase supply if there is more demand. So over the past months they got more demand and they supplied the market with additional crude," said Ross.

"I think Saudi Arabia is comfortable with its current production volumes and is happy to restore market share. They are unlikely to go much above 10 million," he added.

‘Super competitive’ 

Naimi has repeatedly said that Saudi Arabia's loss of its share in major markets was the main reason it decided against cutting production at OPEC's last meeting in November 2014.

The decision contributed to a steep decline in oil prices to below $50 per barrel in January from $115 in June 2014.

The Saudis are hoping the development will cut output from high-cost producers, such as US shale explorers, and win back market share for low cost producers such as Saudi Arabia.

The past weeks have shown that Riyadh was not waiting for a bigger market share to come their way, but was pro-actively managing the situation.

"The Saudis have been placing more barrels in Europe since February — something I haven't seen for a long time. It creates additional pressure on Russia and Kazakh oil grades," indicated a trader with an oil major, which buys large volumes of Saudi, Russian and Kazakh crude.

Russia and Kazakh supplies to the Mediterranean markets have fallen in January and February because of bad weather. Nigerian exports have also dropped due to disruptions.

"Basically, the Saudi selling prices have been super competitive and hence demand for their crude strong," said Amrita Sen from Energy Aspect, who also saw back in February Saudi supplies exceeding 10 million bpd in March.

According to Thomson Reuters Oil Research and Forecasts, US imports of Saudi crude stood at 30 million barrels in February, overtaking China after Saudi Arabia cut prices for America.

Sen indicated that higher than expected refinery runs and fuel demand in Asia and Europe had also allowed Riyadh to sell more.

State giant Saudi Aramco said it saw supplies to China rising over time.

"We see our energy supply potentially doubling... as China's energy demand grows," Aramco's chief Khalid Al Falih told Beijing-based media group Caixin in an interview.

Saudi Arabia tends to raise production without increasing exports in the summer months when local power demand spikes due to air conditioning needs. Demand at home has also been rising as domestic refining capacity grew. 

However, the kingdom has invested heavily in gas production so it could save more crude for exports instead of burning it for power generation.

Separately, a senior Gulf OPEC delegate told Reuters on Tuesday that stronger-than-expected global oil demand should help support crude prices at around $55-$60 a barrel in the next two months despite some signs of a growing glut in the United States.

The comments appear to counter some market forecasts that the US oil glut may push prices to as low as $20-$30  and are a sign that the core Gulf OPEC members remain confident about their strategy of defending market share.

"Global demand is definitely growing much stronger than expected. In December, January, and especially February it was beyond what forecasts anticipated," the delegate said.

Low oil prices may have encouraged demand to pick up particularly in the United States but also in Asia, the Gulf delegate, who declined to be identified, added.

Oil prices are expected to fluctuate around $55-$60 a barrel through April, when they may come under pressure because of seasonal refinery maintenance and rising stocks in the United States, the Gulf OPEC delegate continued.

International benchmark Brent crude was trading above $55 on Tuesday.

Underlining brimming US supplies, crude stocks rose nearly three times as much as expected, as storage at the Cushing, Oklahoma oil hub reached a new record, a government report showed last week.

"There are still uncertainties, prices will stay fluctuating around 55-60 dollars," the delegate indicated. "If you look at the US, it's really tough, stockpiling is rising. But if you look at the international market, stocks are on the higher side but they are still within the five-year average."

The Gulf OPEC delegate said rising production reflects increasing exports to meet global demand as well as growing local needs.

"Increased production is due to two reasons: sales for the international market reflecting stronger demand from customers, not anything else, and local needs with the new refineries online," he indicated.