BEARNOBULL’S WEEKENDER of April 11 reported on the message that Ali al-Naimi sent to “non-OPEC major producers” to participate in production cuts to “restore the supply-demand balance and reach price stability”. I wrote that
In effect, the June 5 OPEC meeting is already under way and Big Daddy wants every “major non-OPEC producers” to know that if they don’t come to the table and “participate in production cuts”, the pain will continue for an indefinite time. This is a 2-month very-high-stakes poker game and the Saudis have placed their chips for everybody to see. Do they really mean business or are they bluffing?
To me, this opening at this time means that the Saudis want (need) higher prices. Ali al-Naimi saying that “oil prices will improve in the near future” is a major departure from the Saudi stance since November which always was to talk prices down.
Later, I found this good WSJ piece (my emphasis)
Saudis Maneuver to Retain Oil Crown Saudi Arabia is struggling to maintain its share of the global oil market in a contest that pits the world’s largest crude exporter against allies in the U.S. and Persian Gulf.
The Saudi kingdom’s oil exports declined 5.7% in 2014 compared with 2013. Oil shipments to its fastest-expanding customer, China, reached their lowest levels since 2011 in the first two months of 2015, according to the China General Customs Administration. And its U.S. sales nearly halved in January compared with a year earlier, according to the U.S. Energy Information Administration. China and the U.S. are Saudi Arabia’s biggest importers, with 10% and 8%, respectively, of the kingdom’s production.
In China, Saudi Arabia is suffering from depressed demand and better deals being offered by its rivals in Russia, Kuwait and the United Arab Emirates. In the U.S., it faces competition from domestic shale producers whose flood of crude has helped shove down world oil prices. (…)
Instead, the kingdom has been forced into a fight with OPEC members, cutting its selling price to Asian customers six times in nine months. But Russia and Saudi Arabia’s Persian Gulf allies have outmaneuvered it, cutting better deals with Chinese, Indian and European refineries, industry analysts said. Kuwait, for instance, boosted its exports by signing a 10-year supply deal last year with China’s largest refiner, China Petroleum & Chemical Corp., known as Sinopec.
The competition could intensify as Persian Gulf countries like Kuwait and the U.A.E. move to boost production to keep market share as global energy demand is expected to rise in the next decade. (…)
Kuwait has made it a priority to ramp up production capacity to four million barrels a day from 3.2 million in 2020, while the U.A.E. wants to boost output to 3.5 million barrels a day in 2017 from about three million barrels a day.
Saudi Arabia’s share of total world output of crude oil fell slightly in 2014 compared with 2013, from 10.3% to 10.2%, according to the International Energy Agency, a Paris watchdog. (…)
In the long term, Saudi Arabia officials have said they are better off working for their share of the market now, than they would be cutting supplies to inflate prices.
(…) With a political framework in place to lift sanctions in Iran, that country’s oil reserves could eventually flood the market and put pressure on OPEC to attempt to boost prices. Iran, a member of OPEC, has said it wants to double its oil exports if sanctions are lifted. Analysts estimate Iran could add between 500,000 and one million barrels a day to the global market. (…)
Oil exports to China from the U.A.E. jumped 116% and from Kuwait by 98% in the first two months of 2015, compared with the same period a year earlier, to their highest levels ever, according to China’s General Customs Administration, mostly at Saudi Arabia’s expense. In November, Kuwait also displaced Saudi Arabia as Taiwan’s top oil supplier, the Customs Administration in Taipei said.
Kuwait’s 10-year supply deal with Sinopec was an example of the kind of long-term contract the Gulf producers are using to lock in customers. Under the contract, which is nearly doubling Kuwait’s oil sales to Sinopec to 300,000 barrels a day, Kuwait will ship the oil itself, cutting transportation costs for the Chinese company, a Kuwaiti oil official said.
Even as Saudi Arabia loses business in Asia, it is becoming more reliant on it. Asia took nearly two-thirds of Saudi crude exports in 2014, according to a Wood Mackenzie report in March, up from 60% in 2006. That is partly because Saudi Arabia has lost customers to U.S. shale producers, despite price cuts to the U.S. market.
Motiva Enterprises LLC, a Gulf Coast refiner half-owned by a Saudi Aramco unit, has been buying less crude from Saudi Arabia and comparatively more from Angola and Venezuela, which tend to be more competitive because of lower shipping costs. Saudi sales to the refiner fell 27% in December 2014 compared with a year earlier, according to data by the EIA.
In Western Europe, Saudi Arabia has threatened to cut off customers who didn’t sign up for fixed volumes, with limited success. In Italy, Iraq overtook Saudi Arabia as the leading seller in late 2014 and 2015, according to Unione Petrolifera, the country’s refining-industry body.
The Saudi strategy was all about sacrificing prices for market share. After nearly a year of lower prices, they have lost market share, mainly to other OPEC and Arab nations which have “outmaneuvered” it to cut long-term deals with some of Saudi Arabia’s largest clients in all continents. In China alone, the most crucial market for the longer term, Saudi Arabia sold 7.9% less crude in 2014 while Iran, Iraq, Kuwait, Angola and the U.A.E. all increased their shipments.
So far, Saudi Arabia is losing on all fronts. Looking forward, the Saudis must be seeing that Iran’s production will be rising sharply again pretty soon and so will that of many of its allies.
Iran is believed to hold at least 30 million barrels in storage, and EIA believes Iran has the technical capability to ramp up crude oil production by at least 700,000 bbl/day by the end of 2016. (EIA)
See also on this: IEA sees sharp rise in Iran oil output in 3-5 years post nuclear deal
Russia has not blinked so far and is unlikely to do so given the drop in the ruble and its need for hard currencies. U.S. production has yet to peak but American producers stand ready to unload storage and resume drilling as soon as prices recover. Canadian production has proven that it is not price sensitive over the short-term. Libyan and Nigerian production have held up, so far, so has Iraq’s amid political/military chaos. Obviously, many capital projects have been deferred, shelved or abandoned, which will likely help boost prices longer term but the Saudis’ market share gambit is not working for them.
EIA numbers indicate that Q1’15 OPEC crude oil production rose 1.1% YoY or 330k bbl/d. Saudi Arabia’s production declined 1.0% or 100k bbl/d during the same period. Meanwhile, world consumption is estimated to have grown 1.2% or 1.1M bbl/d. Non-OPEC supply has gained 1.5M bbl/d during the 12-month period.
At the June OPEC meeting, the Saudis are likely to have little to announce in terms of production cuts from “major non-OPEC producers” while many of its fellows at the table will be ramping up their own production. The “Iran deal” will likely have gone ahead and rising Iranian shipments and production will be looming.
Saudi Arabia is now in face-saving mode.
The risk is that they get no help, realize they have much fewer friends then they thought, and decide to show who’s the boss…