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OPEC Battling for Market Share

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A battle for market share in Asia among OPEC’s largest oil producers has put paid to a slight price rally. Oil prices had inched just over US $60 per barrel in early February, causing some participants in London’s annual February oil conference season to predict that they could reach around US $90per barrel by year end, or at least US$70 according to less bullish opinion.

Other seasoned traders shrugged off the rally as a classic ”dead-cat bounce” and predicted a year-end price closer to US $30 per barrel.

Initially, some of the price rally was attributed to oil traders taking short positions in late November and December as news of falling rig counts emerged from the United States, and oil companies worldwide were cutting back on exploration and production projects.

Full Stocks

However, this did not change the physical position, with the market oversupplied by between 1 million to 1.5 million barrels per day. Floating oil-storage facilities are full to the brim, and land-based storage facilities are filling up fast. U.S. oil stocks in February were estimated at over 430 million barrels – the largest since the 1930s.

Discounts

The oil-price pessimists seemed to be proved right during February, when Iraq’s state oil trader, the Oil Marketing Company, cut its Basrah Light Crude prices for March by an unprecedented US $4.10 per barrel, while the National Iranian Oil Company followed with a US $2.10 per barrel discount for its Light grade. The state-owned Kuwait Petroleum Corporation followed along with a further US $4.10 per barrel cut.

These producers were following Saudi Arabia’s example, when it cut its export prices by US $2.30 per barrel the previous month in order to protect its market share in Asia. The Saudis were pitching themselves for a market-share fight not only with their Middle Eastern neighbours but also Latin American producers such as Colombia, a country that produces lighter, sweeter and better-quality crude than Saudi Arabia.

Over-Supply

The oil producers had little choice but to cut their prices if they wanted to shift export volumes, as the world oil market is traditionally over-supplied over March and April. The market may balance over the coming half-year, depending on both European as well as Asian demand. The European market remains depressed, despite Russian oil companies predicting an oil price of US $70 per barrel by year-end.

Production Volumes

Russia continues to pump 10.6 million barrels per day, with 4.4 million barrels exported, compared with 9.7 million and 9.23 million barrels per day from Saudi Arabia and the U.S. respectively. Even Iran has increased its oil production slightly from 2.77 to 2.78 million barrels per day, but this will not make any difference to the market. Under United Nations and European Union sanctions due to its controversial nuclear programme, Iran can only export 1 million barrels per day. Before the sanctions, it was double that volume.

No Sign of Price Rally

Despite the declining U.S. rig count, few analysts predict any great effect on U.S. oil volumes, as any price rally would mean that the American production could be ratcheted up again quickly. Analysts have already discounted the absence of Libyan oil production due to that country’s political unrest.

With stocks in all industrialised countries at the highest level for nearly five years, traders foresee a situation where the oil producers may have to increase their discounts further to shift their volumes. In trading terms, this is known as contango, where futures spot prices exceed current prices. Traders buying oil today can afford to place it in storage and still sell at a future profit, further undermining any price rally.

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