Page 9 - MEOG Week 10

MEOG PoLICy MEOG
Aramco slashes
crude pricing,
starting oil war as
OPEC fails to deliver
saudI araBIa
WHEN Russia refused to back Saudi Arabia’s proposal for a deeper oil production cut in Vienna on March 6, it effectively fired the first shot in what looks like being an expensive and prolonged oil price war.
Against the backdrop of the Covid-19 crisis, which looks set to cut at least 2mn barrels of daily global demand, at least through 1H20, there is only one conclusion to be made: the price of Brent will test the low of early January 2016 when it briefly dipped below $30 per barrel (p/bbl).
Oil prices lost as much as a third of their value on Monday after the three-year supply agreement collapsed and Saudi Arabia and Rus- sia signalled they would hike output in a market already awash with crude. Saudi Arabia kicked off an all-out oil war on Saturday, slashing official pricing for its crude and making the deepest cuts in at least 20 years on its main grades, in a bid to push as many barrels into the market as possible.
Aramco’s pricing announcement is the first major marketing decision since the OPEC+ talks in Vienna ended in dramatic failure on Friday and Saudi production is set to exceed 10 mil- lion barrels a day next month. Such an increase would amount to more than 3% of Saudi output in February.
The cuts in monthly pricing by state producer Saudi Aramco are the first indication of how the Saudis will respond to the breakup of the alliance between OPEC and partners like Russia.
Aramco’s decision affects about 14 million barrels a day of oil exports, as other producers in the Persian Gulf region follow its lead in setting prices for their own shipments. Every month, the Gulf ’s biggest producers announce the official selling price for their crude grades as a differen- tial – a premium or discount – against regional benchmarks. The changes are usually measured in cents and, at most, a couple of dollars.
The state producer lowered April pricing for crude sales to Asia by $4 to $6 a barrel and to the U.S. by $7 a barrel, it said in a pricing announce- ment emailed Saturday just before midnight Saudi time. Aramco didn’t immediately com- ment on the strategy behind such deep reduc- tions in pricing.
With the coronavirus eroding demand,
pushing Brent crude down about 20% so far this year heading into the meeting on Friday, the Sau- dis had hoped to shore up prices. Brent fell fur- ther after Russia balked at OPEC’s plan, closing the week down more than 30% for the year.
Saudi Arabia pumped 9.7 million barrels a day last month, but with the agreement on out- put cuts expiring at the end of March, the king- dom will be free to produce as much as it wants. The Saudis say they can pump as much as 12.5 million barrels a day.
Aramco slashed its official selling price for flagship Arab light crude to buyers in Asia by $6 a barrel, to a discount of $3.10 below the Middle East benchmark. The cuts eclipsed the $1.90 reduction expected by traders and refiners. It also reduced Medium crude to Asia by $6 a barrel, dropping the grade to a $4.05 discount, according to the company’s pricing sheet.
Aramco sells most of its crude in Asia, a region that - until the virus outbreak in China - had served as the driver for global growth in energy demand.
In one of the most significant pricing moves, Aramco widened the discount for its flagship Arab light crude to refiners in northwest Europe by a hefty $8 a barrel, offering it at $10.25 a bar- rel less than the Brent benchmark. In contrast, Urals, the Russian flagship crude blend, trades at a discount of about $2 a barrel less than Brent. Traders said the Saudi move was a direct attack at the ability of Russian companies to sell crude in Europe.
The world’s biggest oil exporter had expected to announce its pricing on Thursday but delayed the decision until after the meeting on Friday between the OPEC and allies including Russia. The postponement marked the first time in at least a decade that Aramco missed its pricing schedule. It typically announces pricing for its crude on the fifth day of each month.
At the same time, Saudi Arabia has privately told some market participants it could raise pro- duction much higher if needed, even going to a record of 12 million barrels a day. With demand being ravaged by the coronavirus outbreak, opening the taps like that would throw oil mar- ket into chaos.
Week 10 11•March•2020 w w w . N E W S B A S E . c o m P9