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Opinion: The Saudi Oil Price War Is Backfiring

by Gaurav Agnihotri of Oilprice.com

Saudi Arabia has long enjoyed the status of being the top crude oil exporter in the world. With record production of 10.564 million barrels per day in June 2015, Saudi Arabia has been one of the major driving forces behind the current oil price slump.

The Saudis have kept their production levels high since last year in order to drive other players (especially US shale drillers) out of business. Equally clear is the fact that this strategy of maintaining the glut and driving out rivals hasn’t worked so far.

Even when we look at the refining sector, we see that the oil kingdom has been following a similar strategy of flooding the markets with refined fuel. The Saudis have already sparked an oil price war with the Asian refiners downstream by offering close to 2.8 million barrels of low sulfur diesel to the European and Asian markets. This has caused Asian refining margins to fall drastically, the effects of which can ironically now be seen on Saudi Arabia itself.

Saudis are now reducing their crude oil price hikes in Asia in order to save their market share

As the refining margins have fallen in Asia, refiners there have been compelled to cut their refining outputs. This could eventually result in refiners cutting their crude oil imports.

Saudiexports1

Asia has been one of the biggest cash cows for Saudi Arabia and there have already been some cuts in some of the most crucial markets. India, which was earlier importing most of its crude oil from Saudi Arabia, is now changing its strategy and buying more crude oil from Nigeria, Iraq, Mexico and Venezuela.

This made the Saudis blink and they started offering discounts on its medium and heavy grade crude oil to Asian customers. And, in a latest development, the Saudis are now trying to defend their market share as they have only marginally increased the price of the crude oil they sell to Asia, contrary to industry forecasts.

According to a survey by Reuters on 3 August, Saudi Aramco was looking to hike the official selling prices of its crude oil (all the three grades) by around $1 per barrel from September 2015. However, the Saudis know very well that their selling prices are already high and a further substantial price hike might result in customers moving to other crude oil producers (much like what India did). The result is that the price hike on its medium and heavy grades is less than half of what the analysts expected while the price hikes in its flagship Arab light grade is below earlier predictions. This cautious move suggests that Saudi Arabia is on the defensive, hoping to protect its market share.

Is Saudi Arabia losing the oil price war?

“It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run. The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience,” said a recent stability report by the Saudi Central Bank.

In short, Saudi Arabia’s policy of keeping production levels abnormally high and driving out U.S. shale producers simply hasn’t worked. Even as US shale hedges are about to expire, some of the imminent bankruptcies would not result in wells getting abandoned, it would only result in cheaper acquisitions of bankrupt companies by their much bigger competitors. Once oil prices again rise to $60 per barrel levels, the bigger oil companies would naturally ramp up their production levels which would in turn increase US crude oil production.

Thanks to its generous public spending and a costly war against Yemen, one of the major worries for Saudi Arabia is that it is burning through its foreign reserves at an alarming pace. According to the IMF, Saudi Arabia’s fiscal deficit could rise to around $140 billion by this year end. From all this, it seems that the Saudis are now getting beaten in their own game and have been trapped in the oil price war that they themselves created.

Gaurav Agnihotri is an ME and an MBA-Marketing, and an oil and gas professional based in India. Having started his career with Essar Oil Limited as a Graduate Engineer Trainee, he was involved in the Essar Oil Limited’s Refinery Expansion project in Vadinar, Gujarat, India.

He is author of “Oil—Past, present, future—An Indian Perspective”. He has dealt with dealt with oil companies such as ONGC; Oil India limited IOCL, BPCL, HPCL and others.

Source: http://oilprice.com/Energy/Crude-Oil/The-Saudi-Oil-Price-War-Is-Backfiring.html

Comments

Engineer-Poet
REs + 24/7 storage cost is going the other way and will soon be less than 50% the equivalent nuclear cost.

Not going to happen, Harvey.  Truly substituting for nuclear's capabilities requires seasonal storage, which is uneconomic until costs fall to a few dollars per kWh.  Materials alone for most batteries are much more than that.  This is quite literally impossible.

Ontario, Canada has a major problem with its older (18) CANDUs

What trouble?  They're all back on-line now that the Bruce Point refurbishment is complete; that's how Nanticoke was made surplus and shut down.

most USA's units will soon be in the same situation.

US nuclear plants are meticulously maintained and upgraded; most of them will be re-licensed for a further 20 years because they will be literally better than new.

France is seriously considering the replacement of 50% of its existing 58 NPPs with REs + 24/7 storage.

French energy minister Segolene Royal says "get serious".

Germany is phasing out all its NPPs.

A romantic movement, un-tempered by facts or reason.  The last big German romantic movement ended in a big crash in 1945, which would put you off uncritical praise for German romantic movements if you had any sense.  Seriously, these people believe they have to kill nuclear power or else they might die if a tsunami comes up the Rhine.  You subscribe to a lot of crazy notions too, so maybe they're good company for you.

Japan is having strong resistance to restart its NPPs.

And a very strong movement to re-start them, because the Japanese economy will collapse from the cost of imported fuel if they don't.

Are all those (smart) people wrong?

Yes, they're wrong.  They're only "smart" in political terms; if they bothered to look at the bare facts instead of polling results, they would know that the previous generation of technocrats had it right the first time.

Engineer-Poet
you might want to read a paper written by other engineers

Mark Zachary Jacobson is an "environmental" engineer, whose PhD dissertation was on air pollution.  He went on to be a professional academic.  He isn't qualified to design an industrial plant of any type and he has no experience or other qualifications to opine on things nuclear; if he ever had a PE certification it would have been revoked over his public positions.  This is the caliber of Bob's prophet.

HarveyD

Latest 7 and 8 MW, 500 ft high onshore Siemens windmills with a 50% production factor can produce energy @ $0.023/kWh versus latest NPPs at $0.16/kW.

Using many more of the above improved large windmills coupled with variable Hydro plants (with large water reservoirs) could cover most of the current normal/peak loads while preserving precious water far future drier days, specially in BC and Weatern USA States. Wind can stretch water used for Hydro 2X to 5X.

It is the ideal way to produce very low cost clean electricity (24/7). No expensive NPPs or dirty CPPs needed.

Juan Carlos Zuleta Calderón

For a comprehensive analysis of the influence of structural factors, EVs, and peak oil on oil prices see my recent piece published on Seeking Alpha: http://seekingalpha.com/article/3128336-what-will-prevent-oil-prices-from-dropping-or-increasing-forever-structural-factors-global-warming-evs-peak-oil-or-all-of-them

HarveyD

Nuclear e-power has a high cost and a real relative growth problem versus REs.

1) For the last 15 years NPPs capacity had a very slow growth, from about 360 GW to only 379 GW or (1.05 X total growth) totaling close to 11.2% of the world e-energy.

2) For the same 15 years, Wind generation capacity had a very fast growth, from 17 GW to about 425 GW or (25 X growth) totaling almost 5.0% of the world e-energy production by end of 2015 or so.

3) Considering 1) and 2) above very different growth rates, Wind energy may fly by Nuclear energy production capacity sometime between 2020 and 2025 and capture up to 15% of the world e-energy market.

Direct drive 8 MW to 10 MW, 500 feet high, 50+% production factor improved onshore winds units will help to propel lower cost wind energy to a new level in the next 10 years or so.

Nuclear may not move much and even supply less (relative) e-energy. It could go from 11%-12% to below 10% of the total production by 2025 or so.

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