Have Saudis Succeeded In Maintaining Their Oil Market Share?

It’s become an accepted market fact that Saudi Arabia didn’t cut oil output last year in the face of sliding prices as the world’s biggest crude exporter wanted to maintain market share.

Given more than third of 2015 has already passed, it’s probably worth examining if the Kingdom has been successful in keeping market share among its main Asian customers, and what this may mean for its future policy.

Saudi Aramco, the state-owned oil producer, kept prices for Asian refiners steady for its benchmark Arab Light crude for June-loading cargoes, while raising them for European buyers.

This was seen as a sign that Saudi Aramco wants to keep its oil competitive in Asia, while the increase for Europe reflected rising prices for rival grades in recent weeks.

It’s also important to note that the official selling price (OSP) for Arab Light is still at a discount to the regional benchmark Oman/Dubai crude.

The discount for June cargoes was set at 60 cents a barrel, the same as for May.

While the discount has narrowed from $2.30 a barrel for March cargoes, it has been in negative territory for nine straight months.

OSP discounts to the benchmark are still fairly rare, with the last occurrence more than four years ago, so an extended run of discounts show that Saudi Aramco is serious about maintaining its competitive edge, especially in Asia, which accounts for roughly two-thirds of its exports.

DIVERGENCE FROM BRENT-DUBAI SPREAD

Normally the OSP tracks movements in the Brent-Dubai exchange for swaps, which measures the price differential between the main European crude benchmark and its Middle East counterpart.

The one-month exchange for swaps has been holding in a fairly narrow range anchored around $1.60 a barrel since September last year, when I first said that Saudi Arabia was more interested in protecting market share than cutting output to hold up prices.

But while the Brent-Dubai spread has been largely steady, the Saudi OSP has been lowered, breaking the usual correlation between the two, a further sign of Saudi determination to keep their prices competitive.

So, has the tactic worked, and if so, how well?

China is the main buyer of Saudi crude and here the picture is mixed.

In the first three months of the year China imported 12.75 million tonnes of crude from Saudi Arabia, or about 16 per cent of its total, according to customs data.

Saudi Arabia increased its volumes by 0.5 per cent in the first quarter to about 1.034 million barrels per day (bpd), but this meant it was still surrendering market share as China’s overall imports grew by 7.5 per cent.

Big gainers in the first quarter were number three supplier Oman, with a 30.8 per cent rise in its shipments to China over the same period in 2014, Russia with a 14.3 per cent increase and Kuwait with a 47 per cent jump.

Iran, China’s fifth-biggest supplier in the first quarter, saw its volumes drop 1.9 per cent, while second-ranked Angola experienced a 7.5 per cent decline.

But Saudi Arabia’s modest gain in China imports in the first quarter should be seen against the light of a 7.9 per cent decline in 2014 from the previous year.

It could be viewed as a positive that Saudi Arabia has managed to increase volumes to China in the first quarter, thus reversing partially last year’s drop.

INDIA SHARE DROPS, JAPAN GAINS

Saudi Arabia is also the largest supplier of crude to India, Asia’s second-biggest importer, which purchased 757,400 bpd in the first quarter of 2015 from the Kingdom, down 1.8 per cent from the same period a year ago.

Last year, India’s imports from Saudi Arabia dropped 0.5 per cent from 2013, while, among other major suppliers, Iraq’s dropped 17.3 per cent, Iran’s jumped 41.5 per cent and Nigeria’s rose 27.6 per cent.

Saudi Arabia managed to outperform in Japan, Asia’s third-biggest crude importer, in the fiscal year ended March 31.

Japan’s 2014/15 oil imports dropped 7.2 per cent from the prior fiscal year to a 26-year low of 3.36 million bpd, but imports from Saudi Arabia declined by 1.7 per cent.

So even though Saudi Arabia managed to increase market share in Japan, overall volumes still dropped amid weaker demand.

Taken together, the figures from Asia’s top three importers show that Saudi Arabia is more or less holding its ground in market share, but is certainly not increasing it.

This suggests that Saudi Aramco will have to maintain a policy of setting its OSPs at relatively low levels if it wants to see off competitive threats.