With swelling crude oil inventories and rising global oil production, oil prices have now fallen below 11-year lows. On Monday December 21, 2015, Brent was trading at $36.04 per barrel while the WTI benchmark was trading at $34.74 a barrel.
While investment bankers from Goldman Sachs are predicting oil prices to fall to $20 per barrel, there will likely be no respite from cheap oil in the near-term. Amid all this, some interesting developments are emerging within OPEC. Ever since the cartel dismissed all speculations of reducing its production levels on its December 4th meeting in Vienna, OPEC members like Saudi Arabia, Iran and Iraq, in a struggle to obtain greater market share, are becoming increasingly competitive with each other. Related: How Much Oil Is Needed To Power Santa’s Sleigh?
Iran Versus Saudi Arabia and Iraq
"The Saudis and Iraqis are already in the market. If Iran wants to corner their share, it has to offer better terms in the form of discounts and payment conditions, it will be a cut-throat fight for market share among the Gulf producers," said a senior analyst from London based KBC Energy Economics.
Iran is in fact going all out to ensure that it regains its lost market share once the western sanctions against it are lifted. The Islamic Republic is expected to be in a position to immediately increase its production by around 500,000 barrels per day once the sanctions are lifted in 2016. To sell this oil, Iran is targeting its biggest export market, China. Demand for oil here increased to 6.7 million barrels per day in October. China’s import data show that it is busy filling up its Strategic Petroleum Reserves (SPR) with cheap oil. Reports from Reuters suggest that officials from Iran met officials from PetroChina and CNOOC to discuss possible new oil deals. Besides, China’s Sinopec and State Trader Zhuhai are the biggest buyers of Iranian oil whose contracts have been extended for next year. Related: OPEC Members In Jeopardy, How Long Can They Hold Out?
It is pretty apparent that Iran would go all out to grab its share in the Chinese market post sanctions as Iran was China’s third biggest supplier of oil before the western sanctions. Besides China, things are getting pretty heated up elsewhere. In order to compete with Saudi Arabia and Iraq in their lost markets, Iran has started offering deep discounts and other incentives on its future crude oil supplies.
An Iranian delegation recently met with a group of Indian Refiners. In an unprecedented move, these Indian Refiners were asked to propose their own terms and conditions that could make Iran’s crude supplies more competitive than its rivals, (especially Saudi Arabia). This move would naturally put pressure on Saudi Arabia, which is already facing stiff competition from Russia in its key market- China. Saudi Arabia was the second biggest exporter of oil to China in September 2015, being left behind by Russia which supplied around 988,000 barrels a day in the same month.
Saudi Arabia had earlier offered similar discounts (that Iran is now offering) on its medium and heavy grade crude to Asian countries that included India. “The oil market is driven by fear. We have a ‘pump and dump’ war between Saudi Arabia and Iran. It’s possible the Saudis will try to match the Iranians with an extra 500,000 barrels per day in an exhaustion game. Anything could happen, U.S. inventories are already at record highs, yet we are going into a seasonal period when they normally rise further,” said Ole Hanson from Saxo Bank Related: America’s Top Shale Gas Basin in Decline
It is pretty clear that investors world over are surprised by OPEC’s recent decisions of going all out for higher market share and OPEC’s inability to stand ‘united’ over the issue of its production levels. With a strategy aimed at gaining maximum market share and driving other weaker players out of the market, Saudi Arabia, Iran and Iraq have no choice but to compete with each other. After all, they produce an almost similar grade of crude, have the same target markets and use similar trading routes. In the end, it would all come down to the crude pricing and the payment terms that they can offer their customers. The one who would be able to sustain this strategy amid low oil prices would emerge as the clear winner.
By Gaurav Agnihotri of Oilprice.com
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