Saudi Arabia initiating a price war among OPEC members?

Crude oil is poised to extend the biggest slump in more than two years after Saudi Arabia signaled it is ready for a price war with other OPEC members.

Saudi Aramco, the state-run oil producer of the world’s biggest exporter, cut prices on October 1 for all its exports, reducing those for Asia to the lowest level since 2008. The move suggests that the biggest member of the Organization of Petroleum Exporting Countries is prepared to let prices fall rather than cede market share by paring output to clear a supply surplus.

Aramco reduced official selling prices, or OSPs, for all grades of crudes to all regions for November. It lowered the OSP for Arab Light to Asia by $1/bbl to a discount of $1.05 to the average of Oman and Dubai crude, the lowest level since December 2008. OSPs are regional adjustments Aramco makes to price formulas to compete against oil from other countries.

Saudi Arabia’s decision to slash the official selling price for its oil has sparked trader talk of an emerging OPEC price cutting war, as members of the producer group could compete to defend their market share amid ample supplies and tepid demand.

Industry and trading sources in the Middle East say there was now a risk of a race to the bottom, at a time when many were calling for unity from members of the Organization of the Petroleum Exporting Countries (OPEC) as it faces one of the steepest price slides since the financial crisis.

Iran dropped its OSP to Asia for Iranian Light to a premium of 18 cents/bbl to the average of Oman and Dubai crude in October, down from $3.96 in January and the lowest since November 2010. Iraq’s October OSP to Asia was a discount of $2.50/bbl to the same crudes, the lowest level since January 2009.

Iraq and other OPEC members have also been cutting their Official Selling Prices (OSPs) as Brent has fallen, though the size of the Saudi price cut still surprised many observers.

It is believed that refraining from further cuts would preserve the volume of Saudi Arabia’s oil sales, curb revenues for competitors and discourage production of US shale oil.

Saudi Arabia has acted in the past to stop a plunge in prices. It made the biggest contribution to OPEC’s production cuts of almost 5 MMbopd in 2008 and 2009 as demand contracted amid the financial crisis. The kingdom would need to reduce output about 500,000 bopd to eliminate the supply glut now stemming from the highest US output in three decades.

International oil prices have fallen by 20 percent from a year high above $115 a barrel in June as faster-than-expected growth in US shale oil output and the return of production in Libya has contributed to a glut of crude in the market.

Frank Uzuegbunam