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All News » Oil Price Cuts Between Saudi and Asia

Oil Price Cuts Between Saudi and Asia

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Oil market analysts have had their prescience tested frequently during the past year, and the oil price volatility which has caused so much uncertainty shows no immediate sign of abating. The latest manifestation of this instability came with Saudi Arabia’s surprise announcement that it was cutting its November oil prices to Asia.

Reacting to OPEC

The move is partly reactive: other Organization of Petroleum Exporting Countries (OPEC) have recently been moderating their prices significantly in an attempt to boost demand and retain their market share. It also represents an effort to proactively help stimulate the increasingly sluggish Asian economies on whose oil trade Saudi Arabia depends.

The Saudi Arabian Oil Company (Aramco) said that, in November, it would reduce its official selling price for Medium grade to Asia to a discount of $3.20 per barrel below the regional benchmark, compared with a $1.30 discount for sales in October. This is the largest discount for Asia since Aramco reduced the price by $2 per barrel early in 2012.

Aramco, the Saudi Arabian state oil company, also increased the discount for Arab Light Crude to Asia by $1.70 per barrel to $1.60 per barrel less than the regional benchmark. Simultaneously, it reduced its pricing for Light, Medium and Heavy grades to the United states by $0.30 per barrel.

In a speech following the Aramco announcement, Saudi’s Oil Minister, Ali Al-Naimi, said that his country had “to do the right thing…and the right thing is to keep focused on demand and supplyā€¯.

Mixed Reactions

The move received a muted welcome in many quarters, with some analysts, bankers and economists saying that the Saudi approach, largely supported by other OPEC states, will stimulate demand and ultimately increase prices as well as put significant pressure on competing countries such as the United States.

This, however, is by no means the consensus. There remains a real concern that the price tinkering is doing little to control the over-supply which underpins the oil market instability. In fact, there are signs that some countries are reducing production, but the latest research shows that billions of surplus barrels are still being produced. There are also suggestions that fellow OPEC members are beginning to question the strategy, with Iran, for example, openly calling for production to be slashed rather than prices.

Saudi Arabia has to hope that its strategy will prove successful: its economic indicators are increasingly alarming. It is, for example, carrying a budget deficit which will necessitate swingeing spending cuts. Ali Al-Naimi has, nonetheless, said that his country will continue to invest heavily in all phases of oil and gas production as well as in renewables such as solar power in order that future generations can enjoy the cleanest, most stable sources of energy possible.

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