Saudi Arabia puts market share on the line to bolster oil prices

Saudi Arabia has cut its crude production to lows not seen since the depths of the coronavirus pandemic to defend oil prices, a gambit that has chipped away at its market share in the key battlegrounds of Asia as volumes rise from OPEC+ counterparts Russia and Iran, among others.

However, with analysts estimating Riyadh's price floor around $75/b amid an uncertain market outlook, the kingdom may have to maintain its low output levels for a while, if not cut further, though Dated Brent was assessed Jan. 22 at $82.17/b.

Saudi Arabia, which co-chairs the OPEC+ alliance with Russia, has committed since July to holding its output at 9 million b/d. But in recent months it has under-pumped its target, self-reporting production of 8.82 million b/d in November and 8.94 million b/d in December, according to figures published by the OPEC secretariat.

To soften the blow to its output, Saudi Arabia tried to incentivize buyers with a uniform $2/b cut to its official selling prices for its February crude sales to all regions. The move has been met with mixed market response, trade sources say.

"The pandemic has shown Saudi Arabia can go lower [in terms of output], but probably that would require a recession and falling oil demand and would require other OPEC+ [members] to cut as well. That is not our base case," said Giovanni Staunovo, commodity strategist at Swiss investment bank UBS.

Analysts with S&P Global Commodity Insights, however, expect another round of OPEC+ cuts in the first quarter, the group's fifth since October 2022, to shore up weak prices in the face of rising non-OPEC supply.

How the alliance divvies up the cut would require deft negotiations, as Saudi Arabia, which has gone from an OPEC+ quota of 11.03 million b/d in September 2022 to the current 9 million b/d, is likely to find a unilateral cut without cooperation from other members "pretty tough to swallow", said Jim Burkhard, vice president of oil markets, energy and mobility at S&P Global.

The Saudi energy ministry and state-run Saudi Aramco declined to comment on production strategy and recent output levels, but OPEC's own market analysis is bullish, seeing global oil demand increasing 2.25 million b/d in 2024 and another 1.8 million b/d in 2025, outpacing growth in non-OPEC supply.

Current OPEC+ quotas are set through the end of March, though ministers have said they can be adjusted as needed.

OPEC+ output growth

Saudi Arabia's production restraint has come while Iran, which has been exempted from an OPEC+ quota while under US sanctions, has seen its output grow significantly. Tehran pumped 3.10 million b/d in December, according to the latest Platts OPEC+ production survey by S&P Global, a year-on-year increase of more than 500,000 b/d.

Meanwhile, Russia, also under western sanctions, has not committed to any OPEC+ production cuts but rather modest export cuts of 300,000 b/d for the first quarter of 2024.

As Riyadh has implemented its deep production curbs, it has ceded its top exporter status in China to Moscow, which has sold its crude at discounts. Official data from Beijing show Russia sold an average of 2.15 million b/d to China in 2023, increasing its market share in China to 19%, compared to Saudi Arabia's 15%.

Also potentially denting Saudi market share is a quota increase for the UAE that went into effect Jan. 1, with Abu Dhabi's output set to rise by 30,000 b/d.

Lower selling prices

Traders say beyond its production cuts, Saudi Arabia may have lost sales with its pricing strategy, with Aramco's OSPs often viewed as too high over recent months.

Aramco appears to be attempting to recalibrate, by slashing its February prices by $2/b to all regions, resulting in OSPs for its lighter and medium crude grades falling below the 10-year average, while the Arab Heavy was still markedly above the average.

Iraq and Kuwait followed suit with their own OSP reductions, with the former cutting $1.80-$1.90/b and the latter slashing by $1.85-$2/b.

Saudi Arabia's keenly-watched OSPs set the tone for regional players and also indicate oil policy within the OPEC kingpin and world's largest exporter.

"If Saudi Arabia wants to keep exporting crude oil, it needs to adjust the prices to market fundamentals. Otherwise, if prices stay elevated, demand for their barrels would come in low," Staunovo said.

Bjarne Shieldrop, chief commodities analyst at Swedish bank SEB, said the OSP cuts appeared to be Aramco's bid to ensure that its entire 9 million b/d of targeted production is sold.

It is a signal to the market that it vows "to remain competitive" and is unwilling to "unilaterally reduce" its volume below 9 million b/d. The move however did not indicate that the kingdom was suddenly shifting its strategy from price to volume, he added.

Saudi Arabia's policy at the start of the year mirrors its strategy in early 2020 at the start of the pandemic, when it also cut selling prices by $2/b from February to March. Eventually, a price war would break out between Riyadh and Moscow, when the two OPEC+ co-leaders could not agree over production cuts to combat slumping demand from the pandemic.

However, a Beijing-based analyst who did not wish to be named, said the recent cuts could only keep Aramco's market share unchanged, as they were not deep enough reductions.

Saudi crude loadings reached 5.7 million b/d in December and are poised to reach 6 million b/d in January, according to S&P Global Commodities at Sea data.

With its tone set for the year, Aramco might need to "soften" its OSP pricing next month if it is to defend its market share, Dong Wang, Middle East oil markets senior analyst at S&P Global Commodity Insights, said.

"February's cut seemed not big enough to attract Asian buyers to increase their term nominations," he added.