Top oil exporter Saudi Arabia faces a dilemma when setting its monthly export prices this week, as rival producer Iran ramps up crude shipments into an already oversupplied market.
Export prices set by state oil giant Saudi Aramco could offer a glimpse into whether the Organization of Petroleum Exporting Countries' kingpin will continue a strategy of keeping output high and defending market share even with global benchmark prices around $30 a barrel.
Saudi Arabia's economy has suffered from low oil prices, and the entry of new Iranian crude into the market will only intensify its economic problems.
Following the lifting of Western sanctions against Iran last month, Tehran has moved quickly to restore relations with buyers, ordering a rise in oil output by 500,000 barrels a day.
"We now really see Iranian crude starting to move, and that should alert the Saudis," said one trader with a North Asian refiner, suggesting the kingdom may have to offer Asian refiners even more attractive prices to keep market share.
Saudi Arabia's official selling prices (OSP) in the last two months have been seen as attractive relative to other Middle East producers, indicating the country is seeking to protect its market share.
"The Saudis have become quite cooperative," said another trader with an Asian refiner. "It seems easier to agree on operational issues, for example if we want to postpone or advance a cargo."
This month, Saudi Arabia is expected to make relatively modest changes to its prices, with a decrease seen for lighter grades and an increase seen for the heavier grades, a survey of five Asian refiners showed.
The traders mostly expected the price gap between lighter and heavier grades to narrow because of an increase in the value of fuel oil relative to lighter oil products like gasoil during January.
Although physical oil markets were relatively strong over the last month, the contango – a market structure when prices for immediate delivery are below those for delivery in future months – widened in January compared to December. Saudi Aramco tends to lower its OSPs in such a situation.
Saudi crude OSPs are usually released around the fifth of each month, and set the trend for Iranian, Kuwaiti and Iraqi prices, affecting more than 12 million barrels per day (bpd) of crude bound for Asia.For all the latest energy and oil news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.