Macroscope | Saudi reduction shows cycle of weak crude oil pricing is not over yet
Although traders expected a bigger cut, the kingdom's strategy reflects desire to maintain share in an over-supplied Asian crude market
Saudi Arabia's decision to lower prices for oil loading in November shows that the battle for market share in an over-supplied Asian crude market is far from over.
Saudi Aramco, the kingdom's state-owned oil company, cut its official selling price (OSP) for its main Arab Light grade to Asia to a discount of US$1.60 a barrel to the regional benchmark Oman/Dubai price for November from a premium of 10 cents for October cargoes.
While the reduction was at the lower end of expectations of traders, it still indicates the Saudis are willing to accept reduced prices in order to keep their crude competitive.
In turn, this shows that there is still likely some distance to go before the end of the current cycle of weak crude prices, especially if one accepts the view that the Saudi pricing strategy reflects their desire to maintain market share over pricing power.
A wider contango in the Dubai market structure in recent weeks, with oil for three months out commanding a higher premium than spot deliveries, was always likely to lead to a drop in the Saudi OSPs.
The OSPs probably didn't decline by as much as indicated by the contango because they hadn't risen by as much in the third quarter, when the contango virtually disappeared amid strong demand for prompt supplies.