Saudi Arabia is struggling to maintain its share of the global oil market in a contest that pits the world’s largest crude exporter against traditional allies in the U.S. and Persian Gulf.
The Saudi kingdom’s oil exports declined 5.7% in 2014 compared with 2013. Oil shipments to its fastest-expanding customer, China, reached their lowest levels since 2011 in the first two months of 2015, according to the China General Customs Administration. And its U.S. sales nearly halved in January compared with a year earlier, according to the U.S. Energy Information Administration. China and the U.S. are Saudi Arabia’s biggest importers, with 10% and 8%, respectively, of the kingdom’s production.
In China, Saudi Arabia is suffering from depressed demand and better deals being offered by its rivals in Russia, Kuwait and the United Arab Emirates. In the U.S., it faces competition from domestic shale producers whose flood of crude has helped shove down world oil prices.
It is an unfamiliar position for Saudi Arabia, long considered the linchpin of the world oil market, and reflects a new order emerging in the global crude market since oil prices plunged more than 50% since last June. The situation also underscores the risks Saudi Arabia took last November when it persuaded fellow members of the Organization of the Petroleum Exporting Countries to forsake their traditional role of boosting prices when the market tanked. Instead, Saudi Arabia said it and OPEC would keep pumping and let oil prices fall.
The assumption: Saudi Arabia, with its vast reserves of inexpensive-to-produce crude, would be well-positioned to maintain market share and even get new customers after Brent crude-oil prices fell below $50 a barrel early this year from highs of $115 in 2014. On Friday, Brent crude settled at $57.87, up 2.3% on the day.
Instead, the kingdom has been forced into a fight with OPEC members, cutting its selling price to Asian customers six times in nine months. But Russia and Saudi Arabia’s Persian Gulf allies have outmaneuvered it, cutting better deals with Chinese, Indian and European refineries, industry analysts said. Kuwait, for instance, boosted its exports by signing a 10-year supply deal last year with China’s largest refiner, China Petroleum & Chemical Corp., known as Sinopec.
The competition could intensify as Persian Gulf countries like Kuwait and the U.A.E. move to boost production to keep market share as global energy demand is expected to rise in the next decade.
“Saudi Arabia will have to compete more aggressively with fellow OPEC members,” said John Hall, head of U.K. consultant Alfa Group and a longtime OPEC watcher. “But Saudi Arabia may not be the winner.”
Kuwait has made it a priority to ramp up production capacity to four million barrels a day from 3.2 million in 2020, while the U.A.E. wants to boost output to 3.5 million barrels a day in 2017 from about three million barrels a day.
Saudi Arabia’s share of total world output of crude oil fell slightly in 2014 compared with 2013, from 10.3% to 10.2%, according to the International Energy Agency, a Paris watchdog.
Saudi Arabia’s struggles come as the global oil market is oversupplied by between one and two million barrels of oil a day, analysts estimate. A report from the Energy Information Administration on Wednesday showed the U.S.’s crude stockpiles soared to a record last week, posting the biggest increase in 14 years as oil production rose. Meanwhile, global demand is increasing but is falling in industrialized countries.
Saudi Arabia oil officials have said they can weather low oil prices. The country’s $750 billion in foreign-currency reserves can help the country cover the kingdom’s spending requirements for at least eight years at these prices, officials have said. The U.A.E. and Kuwait can run their budgets at much lower prices than Saudi Arabia, at $77.3 a barrel and $54 a barrel, respectively, compared with $106 a barrel for the kingdom, according to analysts.
Despite lower prices, U.S. shale-oil output hasn’t declined, underscoring its resilience to a Saudi price war despite its high production costs.
In the long term, Saudi Arabia officials have said they are better off working for their share of the market now, than they would be cutting supplies to inflate prices. With the U.S. producing more than 11 million barrels a day, it isn’t clear whether a production cut from Saudi Arabia or OPEC would boost oil prices.
In a speech in Germany in March, Saudi Oil Minister Ali al-Naimi described the country’s effort for market share as a “quest.” He said the kingdom had advantages, including some of the cheapest crude in the world to produce. “It is an advantage which we will use, as any producer would, to help supply dependent global customers,” Mr. Naimi said.
Ibrahim al-Muhanna, a senior adviser in Saudi Arabia’s oil ministry, defended OPEC’s decision to keep up production in a speech Thursday. Since the 1970s, he said, the cartel had decreased production 19 times and was successful in propping up prices only eight of those times.
Mr. Muhanna called the idea of a price war within OPEC “an imaginary concept.” He said some national oil companies may offer special deals but not Saudi Arabia’s. “It is difficult to imagine a price war between the Gulf region oil companies because it is unpractical and harms the states and producing companies,” Mr. Muhanna said.
Still, there are signs that low oil prices are affecting Saudi Arabia. State-owned Saudi Arabian Oil Co., known as Saudi Aramco and the world’s largest oil producer, is cutting costs, officials said, and recently obtained new lines of credit of $10 billion to keep financial flexibility. Aramco is seeking cost cuts of 20% from its oil-services contractors. Analysts and industry observers said the company is benefiting from low borrowing costs to fund future acquisitions.
It pumped about 10.3 million barrels a day in March, a record. Some of that crude, which would once have been exported, may have been sent instead to new refineries Saudi Arabia has built in recent years, giving it a hedge against prices, analysts said. Saudi Arabia plans to become the world’s second-largest exporter of refined oil products in 2017 behind the U.S. as part of its drive to diversify its economy and increase its share of the global crude and petroleum-products markets.
“With its refineries, Saudi Arabia has created a new market,” said Jason Gammel, an oil analyst at Jefferies in London.
The moves come at a delicate moment for OPEC. With a political framework in place to lift sanctions in Iran, that country’s oil reserves could eventually flood the market and put pressure on OPEC to attempt to boost prices. Iran, a member of OPEC, has said it wants to double its oil exports if sanctions are lifted. Analysts estimate Iran could add between 500,000 and one million barrels a day to the global market.
At the same time, OPEC coalitions are fraying ahead of its next meeting in June. Saudi Arabia has traditionally been its leader, but its closest allies there, Kuwait and the U.A.E., are now among its biggest market competitors.
And long-standing ties between importers and OPEC exporters are changing.
Oil exports to China from the U.A.E. jumped 116% and from Kuwait by 98% in the first two months of 2015, compared with the same period a year earlier, to their highest levels ever, according to China’s General Customs Administration, mostly at Saudi Arabia’s expense. In November, Kuwait also displaced Saudi Arabia as Taiwan’s top oil supplier, the Customs Administration in Taipei said.
Kuwait’s 10-year supply deal with Sinopec was an example of the kind of long-term contract the Gulf producers are using to lock in customers. Under the contract, which is nearly doubling Kuwait’s oil sales to Sinopec to 300,000 barrels a day, Kuwait will ship the oil itself, cutting transportation costs for the Chinese company, a Kuwaiti oil official said.
Even as Saudi Arabia loses business in Asia, it is becoming more reliant on it. Asia took nearly two-thirds of Saudi crude exports in 2014, according to a Wood Mackenzie report in March, up from 60% in 2006. That is partly because Saudi Arabia has lost customers to U.S. shale producers, despite price cuts to the U.S. market.
Motiva Enterprises LLC, a Gulf Coast refiner half-owned by a Saudi Aramco unit, has been buying less crude from Saudi Arabia and comparatively more from Angola and Venezuela, which tend to be more competitive because of lower shipping costs. Saudi sales to the refiner fell 27% in December 2014 compared with a year earlier, according to data by the EIA.
In Western Europe, Saudi Arabia has threatened to cut off customers who didn’t sign up for fixed volumes, with limited success. In Italy, Iraq overtook Saudi Arabia as the leading seller in late 2014 and 2015, according to Unione Petrolifera, the country’s refining-industry body.
“It’s going to get bloodier,” said Amy Myers Jaffe, the executive director for energy and sustainability at the University of California, Davis.