Riyadh cuts oil prices as it reclaims market share

Riyadh cuts oil prices as it reclaims market share
3 min read
06 October, 2015
Analysis: Following other Gulf producers, Saudi Arabia cut its oil prices on Sunday as it attempted to regain market share, even as its foreign reserves fell to a two-year low.
Saudi Arabia is fighting to increase its share of the international oil market [Getty]
Saudi Arabia is fighting to claw back its share of the international oil markets after crashing the market by refusing to cut oil production last November.

The kingdom made deep reductions to the prices it sells oil for on international markets on Sunday, following cuts by rival producers in the Gulf region last month, The Wall Street Journal reported.

Its state-owned oil Saudi Aramco slashed the price of its light-crude deliveries to Asia by $1.70 a barrel, undercutting the price offered by Gulf rival Dubai by $1.60. The price of its heavy oil has been cut by $2 a barrel for customers in the Far East and by 30 cents a barrel to the US, the Journal reported.

Other regional producers made large cuts to their official prices last month.

To swing or not to swing?

Saudi Arabia's decision not to act as a swing producer and protect prices by reducing production was intended to let the kingdom reclaim its share of the international oil market, punishing rival producers such as US shale oil producers and, many have speculated, Iran and Russia.

The oil-rich kingdom is showing the financial strain after its decision not to reduce production crashed oil markets
The oil-rich kingdom is showing the financial strain after its decision last November not to reduce production crashed oil markets, resulting in the price of oil falling by more than 50 percent.

Its strategy of targeting market share over price may be paying off, albeit slowly.

Saudi Arabia exported 1.076 million barrels per day (bpd) to the US in June, up from a six-year low of 788,000 bpd in January this year.

The kingdom is also exporting more crude to Europe.

The fall of its market share "was like a watershed when the Saudis said 'we can't allow this to fall any lower'," a source close to OPEC and Saudi Arabia who declined to be identified told Reuters.

However, David Fyfe, head of market research and analysis at the Gunvor Group, said: "It's probably taking more time than they (the Saudis) thought for the strategy to bear fruit," Reuters reported.

"That said, the process of re-balancing has begun."

Draining its reserves

Riyadh is also burning through its foreign reserves, which fell to their lowest level in over two and a half years, Bloomberg reported on Sunday.

The kingdom's vast foreign reserves have now fallen for the seventh month in a row, to $654.5 billion, said the Saudi Arabian Monetary Authority in its latest statement.

Its reserves stood at almost $740 billion a year ago.

Its budget deficit might be as much as 20 percent of its GDP this year, according to the International Monetary Fund.

The financial drain has promoted the kingdom to plan bond issues for the first time since 2007. Informed sources told Bloomberg the kingdom aimed to sell about $24 billion before the end of the year.

It has also withdrawn as much as $70 billion from global asset managers, according to financial services market intelligence company Insight Discovery.

However, the kingdom has refused to say how it might cope with a prolonged period of low oil prices. Its planners are said to be considering cuts to programmes previously considered off-limits, like phasing out domestic fuel subsidies and investing in renewable energy.