Speculation over further Saudi oil price cut

Asian traders are split on whether Saudi Arabia will deepen the crude price cuts that propelled oil into a bear market this month.

State-run Saudi Arabian Oil Co. will announce official selling prices for supplies to buyers in Asia for December next week after cutting prices to the lowest in almost six years for a month earlier. The world’s biggest oil exporter will further discount supplies, according to seven respondents in a Bloomberg survey of traders. Six people forecast prices to be unchanged and two predict an increase.

Saudi Arabia’s decision may signal whether the biggest producers in the Organization of Petroleum Exporting Countries will offer bigger discounts to defend market share as the highest U.S. output in three decades boosts global supplies. After the most recent price cut on Oct. 1, Brent crude tumbled 9 percent and West Texas Intermediate slumped 11 percent amid speculation that OPEC won’t reduce production.

“The Saudis will have to reduce prices to remain competitive in Asia,” B.K. Namdeo, the refineries director at Hindustan Petroleum Corp., India’s third-largest state refiner, said by phone yesterday. “The only other option is to curtail output if they are desperate to hold on to prices.”

Saudi Arabia cut prices for all grades and to all regions for November. The Asian price of the Arab Light grade was lowered by $1 a barrel to a discount of $1.05 to the average of Oman and Dubai crudes, the benchmark published by Platts, the energy-information division of McGraw Hill Financial Inc. That’s the lowest since December 2008.

Iran followed with its own price reductions a week later, also selling its oil to Asia in November at the biggest discount in almost six years. Kuwait and Iraq also lowered official prices.

The discounted supplies show how Middle East oil producers are seeking to hold on to customers in Asia, where they face increased competition. Cargoes from the U.S. to Russia and Latin America to Africa are finding buyers in the region amid a surplus in international markets.

“There is an upcoming OPEC meeting later this month and Saudi Arabia will probably not change its policy ahead of the meeting,” Takashi Hayashida, the chief executive officer of Elements Capital, said by phone from Tokyo.

OPEC is unlikely to lower its production ceiling when it meets Nov. 27 in Vienna, said Mohsen Qamsari, director for international affairs at state-run National Iranian Oil Co., according to a Shana report on Oct. 27.

Futures for Brent and West Texas Intermediate, the U.S. benchmark, have both fallen more than 20 percent from their June peaks, meeting the common definition of a bear market. Brent was trading at $85.52 a barrel on the London-based ICE Futures Europe exchange at 10:36 a.m. WTI was at $80.57 a barrel on the New York Mercantile Exchange.

Members of OPEC, who pump about 40 percent of the world’s oil, aren’t waging a price war and haven’t demanded an emergency response to the plunge in crude futures, Abdalla El-Badri, the group’s secretary-general, said at the Oil & Money conference in London on Oct. 29.

OPEC’s collective output in 2015 will remain close to this year’s level of about 30 million barrels a day, he said.

Some representatives have called for action. The group’s output target should be cut to 29.5 million barrels a day, Libyan OPEC governor Samir Kamal said by e-mail on Oct. 27. The market is oversupplied by about 1 million barrels a day, he said in a separate e-mail on Oct. 22.

Global supplies are increasing as a combination of horizontal drilling and hydraulic fracturing, or fracking, has unlocked supplies from shale formations in the U.S. Output expanded to 8.97 million barrels a day in the week ended Oct. 24, according to the Energy Information Administration. That’s the most in data going back to Jan. 14, 1983.

Saudi Arabia produced an estimated 9.7 million barrels a day in September, data compiled by Bloomberg show.

“The market is closely looking at whether the Saudis will start adjusting their output,” Hayashida said. “The market’s attention is focused on if the Saudis will retain its position as a swing producer or if the U.S. will take over the swing producer role.”-Bloomberg