A decision by the 12-member OPEC not to cut production in November sent prices crashing 60 per cent before a partial recovery in recent weeks.
Gulf and other OPEC members said they wanted to safeguard their share of a market that has faced a supply glut as a result of sharp increases in the production of shale and sand crudes.
“Preserving market share still remains a top priority for Gulf states,” Saudi economist Abdul Wahab Abu Dahesh said.
“This time they are even encouraged by signs their November strategy is working after a drop in US shale oil production and in the number of rigs,” Abu Dahesh told AFP.
In the face of the sharp drop in their earnings, some OPEC members, led by Iran and Venezuela, have publicly called for the group to cut production to support prices.
“I don’t think that any change will happen at OPEC’s meeting,” a former member of Kuwait’s Supreme Petroleum Council, Musa Maarafi, said. “Gulf states will continue to defend their market share and it is their right to do so.”
“They will not accept to cut output at their own expense unless an agreement is reached with non-OPEC producers,” he added.
The burden of any cut in OPEC output would likely fall on the group’s Gulf members, Saudi Arabia, Kuwait, the United Arab Emirates (UAE) and Qatar, whose production has risen by around 3.5 million barrels per day (bpd) since 2011.
Currently, they pump 16.8 million bpd, or 55 per cent of OPEC’s total, with Saudi Arabia accounting for 10.3 million bpd. They export around 12.5 million, almost two-thirds of the group’s total.
Head of marketing at national oil conglomerate Kuwait Petroleum Corp. (KPC) Jamal Al Loughani told a symposium last week that a change in the global energy map has made market share a highly sensitive issue.
He said the sharp rise in US production to 9.4 million bpd had allowed Washington to stop light crude imports from Africa.
It also cut imports of heavy oil from Latin America, substituting it with Canadian sand oil.
“That led African and Latin American exporters to seek new markets in the east,” said Loughani, indicating that more than 3 million bpd of additional high good quality crudes are being pumped into these markets in competition with Gulf exports.
“That places additional pressure on OPEC members, especially Gulf exporters, to cooperate to maintain market share and even ensure new takers for additional quantities in the future,” he added.
A relative rebound in prices and a drop in US shale oil output is likely to convince OPEC to continue with its strategy.
Data from the US Department of Energy showed US crude production dropping 112,000 bpd to 9.26 million bpd in early May.
“Prices are improving, growth in supplies from outside OPEC, especially shale oil, is lower than before and demand is recovering,” Kuwait’s governor at OPEC Nawal Al Fuzai told reporters last week.
Over the past few weeks, oil prices have climbed about 40 per cent but remain well below their levels of more than $100 a barrel in June last year.
Fuzai said crude oversupply dropped from around 2 million bpd late last year to between 1 million and 1.2 million now.
But Commerzbank warned in early May that “the oil market will continue to be oversupplied until OPEC significantly cuts its output”.
And the International Energy Agency (IEA) reported that the group’s output hit 31.21 million bpd in April, the highest level since September 2012.
“It would thus be premature to suggest that OPEC has won the battle for market share,” the IEA said. “The battle, rather, has just started.”
Separately, Saudi Arabia and its main Middle East OPEC partners are turning down Chinese requests for extra oil as they hold back fuel for their own refineries just as demand from the world’s biggest crude importer hits new records.
While the Saudi and other refusals for additional crude supplies may not be part of a new pricing strategy, the rejections to their biggest client help explain a 40 per cent rise in oil prices this year as Chinese importers have had to seek more oil from other suppliers in what analysts say is still an oversupplied market.
Senior Chinese oil traders told Reuters the Saudis have turned down requests from Chinaoil and Unipec, the respective trading arms of PetroChina and Sinopec, for extra cargoes of crude for May and June loadings, forcing them to seek supplies from producers in West Africa, Oman and Russia.
Saudi Arabia “used to provide as and if we asked for extra cargoes on top of contract during the first four months of the year, but not for May and June”, said a trader with one of China’s biggest oil importers on condition of anonymity as he had no permission to talk to media.
Another source with a Chinese refinery that takes Saudi oil said Saudi heavy crude was “a bit tight” in May and June.
Reuters pricing and trade flow data show a 40 per cent rise in Brent crude since January has coincided with a more than 10 per cent fall in overall Middle East supplies to China , although in historical terms they remain high.
“Our analysis shows that Saudi flows to China have fallen quite a bit in May and their overall market share in China has also fallen,” said Yan Chong Yaw, Director of Thomson Reuters Oil Research and Forecasts in Asia.
The research group’s latest China crude report shows Saudi Arabia’s share of Chinese imports dropped to just over 30 per cent in May from 36.5 per cent in April.
Saudi Aramco, which was not available for comment, had already reduced contractual supplies to some Japanese and South Korean customers in April.
The trader with one of China’s big importers said requests for more crude to Kuwait and the UAE, Saudi Arabia’s closest partners in OPEC, were similarly turned down.
PetroChina and Sinopec officials were not available and seldom comment on trading activity.
With imports of 7.4 million bpd, China overtook the United States as the world’s top crude oil buyer in April.
Needs of their own
Behind the stingier responses to requests for more oil lie mostly domestic factors. Saudi Arabia has traditionally been an exporter of crude oil but an importer of refined products.
That’s changing. Its new 400,000 bpd Yasref refinery became fully operational in April, taking in Saudi heavy crude oil to produce and export petroleum coke, diesel and gasoline.
Saudi Aramco started up its Jubail refinery of the same size last year and also plans to build a third 400,000 bpd facility by 2018.
Other Middle Eastern producers such as the UAE’s Abu Dhabi National Oil Co are also ramping up refineries, and the region is entering its peak burning season in which it uses more crude to generate power for air-conditioning.
“Over the summer, Middle East producers, particularly Saudi Arabia and Abu Dhabi, will have limited additional barrels for sale as new refineries continue their ramp up and increased summer burn absorbs supply,” said US-based research and analysis provider Pira Energy.
Supplies of heavy grades have also been tightened by the shutdown of two fields jointly operated by Saudi Arabia and Kuwait, the Khafji in October for “environmental issues” and the Wafra last week for maintenance amid a land dispute, taking nearly 500,000 bpd of oil out of production.
Asian customers have as well been wary of the quality of Iraq’s new Basra Heavy grade and trying to switch to other crudes, according to industry sources.
Despite turning down some Asian requests, Saudi Arabia and its Middle East allies are still keen to meet as much Asian demand as possible.
The refusals come weeks after veteran Saudi oil minister Ali Al Naimi visited Asia and said demand for its oil was strong, but that Saudi Arabia’s record oil output of over 10 million bpd was ready to meet the needs of its clients.