Dubai: Oil prices fell on Tuesday following Saudi Arabia’s decision to cut prices on exports to the United States in a move to compete with North American shale production.
Brent crude, a global benchmark, fell by nearly 3 per cent to $82.27 (Dh302.17) a barrel in early morning trade in the US on Tuesday. US crude, also falling by around 3 per cent, was at $76.37 a barrel.
“The Saudi’s have been losing market share in the US and this discounting is trying to recover that loss,” said Arjuna Mahendran, chief investment officer of the Wealth Management Division at Emirates NBD, by phone.
Brent, which has lost more than 25 per cent of its value since a high of around $115 in June, has weakened amid excess global supply and weaker economic growth in the larger economies, particularly Europe and China.
Other oil producers are unlikely to follow Saudi Arabia in cutting prices to hang on to market share, said Shwan Zulal, an associate fellow at King’s College and the director of London-based Carduchi Consulting, by phone.
Instead, the oil-producing states are expected to wait out until November 27 when the Organisation of the Petroleum Exporting Countries (Opec) meets in Vienna on November 27 to formally discuss the collapse in prices. But little change is expected given that Saudi Arabia, Opec’s largest oil producer, recently increased production prior to cutting prices to the US this week.
“The Saudis are demonstrating they are in charge of the pricing. They are pretty much in the driving seat,” Zulal said.
A discount from Iraq, another major oil producer, would be politically difficult due to budget restraints, Zulal said.
Other regions are also unlikely to cut prices. Mahendran said a price war is already uneconomical for Brazil and oil producers in West Africa, which face production costs of around $80 a barrel.
“The Saudis cost of production is below $20 [a barrel], therefore they hold the key in which direction prices take,” Mahendran said.
But the Saudis have raised prices elsewhere as they compete with domestic producers in the US market. Prices have increased from Asia and Europe.
Zulal said he expects others to follow suit and increase prices in Asia. However, globally, “prices will be tumbling further.”
According to Zulal, it is unlikely that there will be significant manoeuvring from oil producers — except Saudi Arabia — until November 27 when Opec members are likely to push Saudi Arabia to curtail production.
“Most of the Opec members will be pressing Saudi [Arabia] ... but [they] won’t be having it,” Zulal said.