Saudi Price Cuts An Indication They Won't Abide By Output Deal After All: Analysts

by Ship & Bunker News Team
Friday October 7, 2016

Yet another red flag has been raised about the validity of the agreement reached in Algeria last week to reduce crude supply, in the form of Saudi Arabia cutting prices for some of its exports – a move John Kilduff, founding partner at Again Capital, says "belies the agreement and the prices we're at right now."

Oil giant Saudi Aramco on Wednesday announced it was lowering the cost of Arab Light and other crude products for November delivery to Asian customers.

Kilduff pointed out, "It does fly in the face of the agreement [and] makes me think they're not serious about any cutback agreement"; he added that the Saudis will likely continue competing for share as a result of Iran's determination to boost output to pre sanction levels.

Andrew Lipow, president of Lipow Oil Associates, is also troubled by the strategy: "Clearly, it is inconsistent with the Saudis claim that they're going to cut production in the future, because one would think if you're going to cut production you don't have to cut your crude oil price very much."

A Thomson Reuters survey shows that four refiners predict the price of Arab Light to fall by 20 to 50 cents a barrel; Saudi Aramco lowered the cost of its product by 25 cents.

However, with regards to Organization of the Petroleum Exporting Countries (OPEC) producers overall, Gary Ross, founder and executive chairman of PIRA, thinks the cartel is serious about achieving a sustained oil price of $50-$60 per barrel: "You don't manage the market unless you have a price in mind," he told Reuters, and then went on to note, "They are being cautious, they want to see what will happen with shale; but OPEC's price aspirations only go up over time, they don't go down."

Ross also rejects the argument that higher prices could cause shale producers to increase drilling, thus provoking retaliatory action from OPEC members: "We're not necessarily about to be overwhelmed by shale oil.

"The timing of this is quite deliberate, OPEC is doing this heading into winter and at a time when supply from non-OPEC producers is down."

As for the idea that the Saudis specifically agreed to limit production simply because they are going into their seasonal production decline anyway, Ross countered, "There is a lot more to it than that.

"The policy to push for market share is over; it's a matter now of going back to managing the market."

Yet another view about the strategy of the Algeria agreement was expressed earlier this week by RBC Capital Markets, which said in a note, "Naysayers will undoubtedly ... deem the agreement typical OPEC noise, yet at a minimum it means that OPEC has bought themselves a price floor for at least the next two months heading into the November meeting.”