Thought Piece

[No amount of rejiggering its long-held strategy can help Saudi Arabia keep its market share. Simple supply and demand economics has hit the international oil markets right between the eyes.

Thanks mostly to the growing efficiencies and supply in the US, we are witnessing a fundamental change in the way the oil business is done. It doesn’t matter which oil-producing country, besides Saudi Arabia, one speaks about: Iran, Russia, Iraq, et al.

Look at the new boss of basic economics, who is nothing like the old boss of oil shortage.

Technology, wireless broadband, modern pipelines and transmission, improved efficiencies and production flexibility are the new drivers. Unsurprisingly, this modernization of the supply chain has made for much less market manipulation by any country or any global regions. When OPEC reduces their supply of oil, the shale oil industry simply increases its profitable supply.

In addition, the environmental impact on the world will be profound, with cleaner energy and energy efficiency achieving their rightful place as the quickest, cleanest and cheapest sources of new energy.  Steve]

Saudi Arabia’s Oil Supremacy Falters

The world’s biggest crude exporter is rejiggering its long-held strategy of clinging to market share

By Sarah McFarlane and Benoit Faucon | Updated March 21, 2017 11:50 a.m. ET

Saudi Arabia is losing its grip on big oil markets it once dominated amid a deep production cut that has reshaped global petroleum trade routes and benefited rivals like Iran, Russia and the U.S.

As it pursues a steep production cut aimed at putting a floor under oil prices, the world’s biggest crude exporter is conceding ground to American shale producers and hastening a retreat from the U.S., people familiar with current Saudi policy said.

Saudi Arabia’s crude exports to the U.S. for the week ended March 10 fell by 426,000 barrels a day compared with the previous week, according to the latest U.S. data. That represents the sharpest weekly drop in the time since the Organization of the Petroleum Exporting Countries decided in late November to cut production to raise oil prices.

The drop was by design, the people said, as the kingdom is looking instead to Asia for growth.

But Saudi Arabia is falling behind Russia when it comes to supplying China, China’s General Administration of Customs data shows. China is one of the world’s fastest-growing major oil consumers.

Elsewhere, the Saudi oil machine has been outmaneuvered by Iran and Iraq among big European customers in France, Spain and Italy, according to data from the International Energy Agency.


The Saudi retreat from an all-out battle for these markets reflects the compromises the kingdom is now making to achieve a higher oil price, as it faces fiscal pressures from a burgeoning population and as the planned offering of its state oil company, Saudi Arabian Oil Co., or Saudi Aramco, nears.

“Saudi Arabia is under extraordinary pressure both internally and externally,” said Dr. Jean-Marc Rickli, head of risks analysis at the Geneva Centre for Security Policy.

For years, maintaining market share was a major priority for Saudi Arabia. In 2014, when the price of oil plunged, the Saudis opted against an OPEC output cut to avoid surrendering its share of key markets.

Now, that strategy has changed in ways that would have been unimaginable just a few years ago.

Since Saudi Arabia and OPEC decided to cut production last November, American shale companies have taken advantage of the resulting higher prices to launch a comeback, adding 412,000 barrels a day of new output, according to the U.S. Energy Information Administration. While some of that oil has gone to satisfy the U.S. market, American crude exports have surged to more than 1 million barrels a day this year.

In an interview, Saudi energy minister Khalid al-Falih said the return of U.S. production was “good”—as long as it doesn’t throw global supply and demand out of balance. “Extremes are not good,” Mr. Falih said. “Saudi Arabia is for balance.”

audi Arabia—which throttled output to record levels to compete with a flood of U.S. oil two years ago—is now pulling back amid the renewed onslaught. The kingdom has cut its production by nearly 800,000 barrels a day since October. That is 60% more than it promised as part of the OPEC deal and signals its seriousness about stabilizing the oil market.

“This stabilization has meant sacrificing market share,” said Alan Gelder, vice president of refining, chemicals and oil markets at Wood Mackenzie, an energy consulting firm.

The cuts in exports to the U.S. are the latest in a long series of pullbacks in what was once the kingdom’s most lucrative market. In the 1990s, Saudi Arabia accounted for almost a third of all American crude imports, but it represented only 12% in November, according to the EIA.

To be sure, Saudi Arabia remains the world’s dominant oil producer, able to influence prices because, as it says, the kingdom pumps about 2 million barrels a day below capacity. That means the country has the ability to quickly ramp output up and down, swaying prices in the process.

The Saudi pullback has allowed rivals to pounce.

Russia, which isn’t part of OPEC but agreed to cut output anyway, is pumping near post-Soviet highs. The group’s second-biggest producer, Iraq, remains at near-record output levels. OPEC member Iran was allowed to keep increasing a certain amount of output.

Iraq and Russian officials say they are committed to cutting production and not taking advantage of the Saudis. Iran’s oil ministry declined to comment.

Even before the OPEC production cuts were announced, there had been a clear drop in imports of Saudi oil by major European economies. Shipments of Saudi oil to Spain, Italy and France fell by 11% between July and October, according to International Energy Agency data.

At the same time, Iran sent stored oil to the export market, with a sweetener: a 3% discount against crude from OPEC rivals, according to a rival producer. The result: Iranian oil shipments to Europe surged 45% in December compared with August, according to ship tracker Clipper Data.


An oil terminal owned by Saudi Aramco. Photo: David Lomax/Globe Photos/Zuma Press

“The Saudis are impacted by the OPEC cuts and not the Iranians, so that is helping Iranians to keep pushing a little bit against the Saudi crude,” said Alfonso Mingarro, the head of trading at Spanish refiner Cepsa, which buys from both the Iranians and Saudis.

Saudi Arabia also has been bruised in Asia.

In China, the kingdom accounted for 13% of imports in 2016, down from 15% in 2015, Energy Aspects said.

The kingdom has sought to shore up its Asian market after Russia flexed its muscles there. Last year, Russian state-owned oil company OAO Rosneft outbid Aramco for the second-largest Indian refinery, Essar Oil.

King Salman is on a monthlong Asian tour to promote the Aramco initial public offering and to secure outlets for Saudi crude, including a $7 billion refining agreement with Malaysia. Mr. Gelder of Wood Mackenzie said Saudi Arabia was working to nail down future market share, even as it pulls back today.

Saudi Arabia is trying to become more flexible to capture new demand.

Saudi Aramco has revamped its Chinese operations, selling more to independent refineries there that prefer buying individual cargoes to sealing long-term contracts. The kingdom is also accelerating plans to rely more on refined products like gasoline, which are more profitable than crude.

“They are becoming more proactive,” said a Saudi oil-industry executive.

—Justin Scheck contributed to this article.