Saudi Arabia is eyeing Russia's traditional market in Europe
Saudi Arabia may have declared war on U.S. shale oil, but the kingdom is facing far greater challenges from other competitors, namely Russia, Iran and Iraq, for market share in Asia and Europe.
Oil prices have plunged 50 percent over the past year after the Organisation of the Petroleum Exporting Countries (OPEC), led by top exporter Saudi Arabia, opted not to cut production to shore up prices but to focus instead on retaining market share.
"The USD 100/barrel prices were bringing so much new oil online, so that a Saudi cut in production would have been akin to falling on your sword," said Jim Krane, analyst at the Wallace S. Wilson Fellow for Energy Studies.
"It would have been propping up prices for higher-cost competition, which makes no sense. By maintaining their production, the Saudis would be defending their market share, as well as discouraging investment in competing supply," he said in a note.
The battle for market share has become crucial after the shale boom cut U.S. dependence on imports. Saudi Arabia has seen its exports to the United States, the world's largest oil consumer, fall from a high of 1.5 million barrels per day (bpd) in 2008 to around 1 million bpd in August 2015. Overall, OPEC producers have seen their American exports slashed from 5.4 million bpd in 2008 to 3 million bpd in August.
SAUDI HANDICAPPED ON MARKETING
In China, South Korea, Japan and Taiwan, Saudi Arabia has been losing ground to Russia and Iraq, according to a new report by Citibank. In 2011, Russia and Iraq accounted for just 5% each of Asian crude imports, while Saudi Arabia dominated with 27%, but now the kingdom's market share has dropped to 23%, while Russia and Iraq have seen their share rise 9% each.
"Saudi Arabia has also been handicapped on marketing," wrote Citibank analyst Seth M Kleinman. "In China, in addition to fierce commercial competition, Russia's new advantage stems from significant volume of pre-export finance from Chiba and a three way swap involving Russia, Kazakhstan and China, narrowing the size of the competitive market and catapulting Russia to the number one supplier."
Difficulties in selling spot to an Indian market, where reliance on spot purchase prevails, has also led Saudi Arabia to lose its pole supplier position, and even efforts to sell contract crude on a delivered basis has not solved its marketing dilemma.
As the largest regional supplier, Saudi Arabia's official selling price is also leaked by its customers, which prompts competitors to lower their prices. Citibank believes many Middle East suppliers offer discounts of over 50 U.S. cents per barrel compared to Saudi prices.
In addition, Saudi Arabia's standard credit terms of 30 days for customers are no match for the 60 and 90 day credit terms offered by its competitors and even GCC allies.
EUROPE IN GAME
The fight for market share is also apparent in Europe. As Russia encroaches on Saudi Arabia's traditional markets, the Saudis and other OPEC members Iran and Iraq are making inroads in Europe where Russia dominates the continent's oil supplies.
Data from the International Energy Agency (IEA) showed that OPEC crude imports in OECD Europe were up one million barrels per day year-for-year between January and July, with Iraq accounting for 800,000 bpd of the increase.
"And OPEC appears to be encroaching even further in Russia's back garden with the recent Saudi sailings to Poland. Energy Intelligence are even reporting that PKN Orlen (Poland's largest refiner) are in talks with Aramco over a first-ever term contract," Citibank said. "This would be a blow for Russia, who has dominated crude supplies to Eastern Europe."
Saudi Aramco is also due to deliver a cargo to Swedish petroleum refinery Preem - its first sale in two decades in one of Russia's core markets.
The IEA said that OPEC's top two producers Saudi Arabia and Iraq now appear to be locking in additional supply to Europe before sanctions are eased on Iran.
Before Tehran was banned from selling oil to Europe, it was delivering about 1 million bpd of high-sulphur sour crude - mostly to refiners in the Mediterranean. Now, however, Iran supplies only about 100,000 bpd to Turkey, according to the IEA.
Iran has said that it does not need to seek permission from OPEC to increase oil production in the global market once international sanctions are lifted under the nuclear deal reached between world powers and Tehran.
Russia's energy minister said earlier this month that the best way to address the imbalance in the world oil market was to leave supply and demand to even out in the long term, according to a Reuters report.
When asked about Saudi Arabia and Russia targeting the same export markets, Alexander Novak was quoted by Reuters as saying: "The market situation defines the flows...taking into account traditional ties."
But rising production means that the world is now awash with around three billion barrels of crude, according to latest data from the International Energy Agency (IEA), putting more pressure on crude oil prices.
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