Dubai: Oil prices are not expected to make any big rebound in the short term as major GCC oil producers are offering deep discounts to key emerging market oil importers to gain market share in the face of rising competition from non-Opec producers, according to industry analysts.
“On the demand side, Asia’s emerging economies are the most promising markets. While new suppliers are seeking share in these markets, GCC producers are forced to offer discounts to keep their market share,” said Dr Bassam Fattouh, Director of Oxford Institute for Energy Studies.
Earlier this month Saudi Arabia slashed the price it charges in Asia to the lowest in more than a decade. The price war among producers since Saudi Arabia and Opec allies last November opted not to cut supplies to counter supply glut in the market has seen oil prices tumbling more than a third to under $50 a barrel in just two months.
“The competition is intense in Asia with West African, non-Opec Middle East producers, Latin American and Russian producers wanting to gain access to these markets where oil demand remains promising. Gulf producers are able to offer deeper discounts because of the relatively lower cost of production,” said Fattouh.
Middle East exports to China, by far the region’s biggest importer, increased 2.5 per cent to around 3.8 million barrels per day (bpd) between December and January, with the market share improving to 53.9 per cent from 52.2 per cent in December, according to estimates by Thomson Reuters Oil Research and Forecasts.
The deep discounts offered by Gulf oil exporters to Asia is virtually pricing out most other exporters, such as Nigeria, Angola and Venezuela — and to a lesser extent Colombia and Brazil — which in recent years have boosted exports to Asia after US import requirements were curbed by the shale boom.
Analysts say the strategy of discounts in Asia by GCC oil producers is not surprising in the context of the current market dynamics. While new producers are seeking markets in Asia, some of the Middle Eastern producers such as Libya and Kurdistan whose supplies have dwindled in the past due to political uncertainties are expected to ramp up production in the future.
“While shale oil has put a floor on oil prices, it is a fact that it has also put a cap on long term oil prices. New technology, improved efficiency and yield per well has increased the global supplies, while demand is not moving at the same pace,” he said.
Analysts say shale boom comes with built in bugs of self-destruction in the form of financial leverage. “We expect shale supplies to start recede from the second quarter of this year as the low prices will make production uneconomical for many producers,” said Marios Maratheftis, Global Head of Research at Standard Chartered Bank.
“We can’t wish away shale production overnight, but the heavily leveraged investments in production could eventually lead to bankruptcies and consolidation in the industry impacting supplies,” said Fattouh.
