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Saudi production hike heading for Asia

Riyadh’s plan to boost market share by unleashing a tidal wave of crude onto the Asian market would be a boon for local refiners as the region recovers from Covid-19

The fallout from collapsed Opec+ negotiations escalated on Sunday with the announcement that Saudi Arabia will slash its official Asian selling prices to unprecedented levels. April-loading cargoes sent east from the Kingdom will now be reduced by between $4-6/bl.

The ploy showcased Saudi Arabia’s aggressive new strategy following its failure to convince Opec partners—notably Russia—to agree to further crude production limits. “The gauntlet has been thrown down,” says Shin Kim, head of supply and production, analytics, at pricing agency Platts. “[It] signals the start of an oil price war. Massive discounts leave no doubt about Saudi Arabia’s intention to regain market share from higher cost producers.”

Fellow Middle East producers will now most likely follow suit and be forced to drastically slash prices. “While damaging to crude producers, lower prices and heightened competition in crude markets will provide some relief to Asian refiners,” says Kang Ku, head of analytics, Asia, at Platts.   

But the extent to which Asian refiners, and China in particular, will benefit will be determined by the scale of the Covid-19 outbreak and whether constrained demand can recover. “The upside may ultimately be limited by China’s oil demand and regional refining margins in Asia,” says Wu.

Squeezing the competition

Saudi Arabia’s Asian pricing decision is just one component in its latest drive to capture greater market share. At a base case scenario, Kim expects the Kingdom to raise production from around 9.75mn bl/d to 10.25mn bl/d in the second quarter.

“Lower prices and heightened competition in crude markets will provide some relief to Asian refiners,” Kang Ku, Platts

Russia’s failure to comply with the cuts could add a further 300,000bl/d over the next few months. Middle East producers such as the UAE, Kuwait and Iraq will potentially also add another 400,000-500,000bl/d.

Non-compliance of existing Opec cuts from Nigeria, Iran and UAE was already contributing 400,000bl/d, says Chris Midgley, head of global analytics at Platts. Other potential upside risks affecting supply include the recovery of 1mn bl/d from Libya and, at some point, the return of a maximum 2mn bl/d from Iran, says Paul Sheldon, chief geopolitical advisor, analytics, at Platts.

In an even more aggressive scenario, Platts anticipate Saudi Arabia pumping up to 11mn bl/d. This would likely push Brent below $30/bl. Ongoing uncertainty over the Covid-19 virus and a severely oversupplied market could even propel oil prices into the $20s, says Kim.

Head above water

For now, both Russia and Saudi Arabia are financially buffered. Platts estimates that Russia’s fiscal breakeven price sits at $54/bl while Saudi Arabia has the lowest cost supply in the world. “Russia may simply allow the rouble to slide in order to sustain flow of roubles into their economy,” says Midgley.  

The price shock immediately impacted Saudi Aramco’s share price, which fell below the IPO price of $8.53. A sustained low price could impact the government’s plan to dual-list the company on foreign exchanges—a key component of the country’s diversification agenda. If crude falls below $30/bl then both Russia and Saudi Arabia will likely be forced to resume negotiations, particularly with Saudi Arabia’s population dependent on crude revenues.

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