Saudi's crude oil price cut may set off price war in Middle East - S&P Global

Singapore — Saudi Arabia's decision to cut its crude oil prices sharply over the weekend has added pressure on other Middle East producers to follow suit or risk losing market share, setting the stage for a price war in the region, market participants said Monday.

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Saudi Arabia, over the weekend, announced deep cuts in the price of its oil for customers globally after falling out with Russia on further production cuts to support prices. The price cuts were deepest for Europe -- a move that's widely seen as a direct challenge to Russia -- one of the region's biggest oil supplier.

While Russia may have been the primary target, market participants warned that Saudi's move could set off a broader price war among oil producers within the Middle East as countries such as Iraq, Kuwait, Qatar and the United Arab Emirates may have little choice, but to follow suit.

The Saudi announcement has added a lot of pressure on fellow Middle East producers to match the price cuts, admitted a senior executive with a Middle Eastern oil producer, warning the spat with Russia may harm all oil producers, including Saudi itself. "They are cutting their own nose to spite the face."

Already, benchmark oil prices plunged by as much as 30% in early Asian trade on Monday as investors worried about potentially higher output from Saudi Arabia and an escalating price war.

Saudi Arabia's crude oil prices typically set the tone for other Middle East producers each month, who price their own crude largely in line to remain competitive against barrels from the region's largest producer.

Asian traders are waiting for signs as to whether other oil-dependent Middle East producers are able to match Saudi's price cut, or go even further, as has been the case in the past.

"We don't know if others will cut as much or declare a price war by cutting even more," a senior executive with a large North Asian refiner said.

Cheapest Ever

Saudi Arabia's cut in official selling prices over the weekend took its OSP differentials to the lowest level on record.

Saudi Arab Light, a widely popular grade among refiners, is now priced at $3.10/b below benchmark Oman/Dubai prices, the lowest at least since 1989 when Platts began keeping records.

The previous low for the OSP was at a discount of $2.30/b in March 2015, a time when producers were widely engaged in a battle for market share by undercutting each other's prices before coming to an agreement over product cuts to support falling prices.

With the outbreak of the coronavirus dampening demand, there have already been signs of a pricing war brewing among producers, keen to retain their buyers.

Iraq -- the second biggest Middle East oil producer -- for once has sharply widened the discount of its Basrah Light crude to Saudi's Arab Light in recent months to an average of $1.28/b over January-March versus an average discount of 59 cents/b in 2019.

Traders say it remains uncertain if Iraq can maintain the discount after the steep cuts by Saudi.

"We are wait for other producers, and of course we're going to lift [oil] from the one that's the cheapest," the refining executive said.

2020-03-09 04:24:00Z
https://www.spglobal.com/platts/en/market-insights/latest-news/oil/030920-saudis-crude-oil-price-cut-may-set-off-price-war-in-middle-east