In an expected move, Saudi Arabia has dropped the global crude oil prices, which conflicts the goals and strategy of OPEC+. The cartel keeps whittling down the production to keep up the quotes. So, why did the Saudis start offering their oil at a discounted price?
The Saudi Aramco state-owned oil and petroleum company has lowered February oil prices for all of its customers worldwide. For Asian countries and the US, the price has dipped $2 per barrel. For Europe, the February prices will be $1.5 to $2 dollars per barrel less depending on the brand. This is a sizeable drop, which led to an instant decrease in global prices.
On 8 February, the March Brent crude oil futures are trading at $76.12 per barrel, –3.35%, while the WTI crude oil futures are at $70.77, –4.12%. The next day crude oil made some gains partly due to the halted production at El Sharara, Libya’s largest oil field. The production shrank from 1.2mln barrels per day down to 981,000 barrels per day in early January.
But the Saudis’ moves have raised concerns over the starting global oil price wars. What made them lower the oil price? This conflicts the OPEC+ strategy of decreasing the oil production and exports with an eye to driving up the prices. The optimal price for oil exporters is estimated at $85 to $90 per Brent barrel.
‘The situation at the oil market is tense. Despite the external risks that typically have a positive impact on the quotes, the economic factors such as the oversupply show more leverage. Hence the falling oil prices,’ explains Nikolai Dudchenko, an analyst at FINAM.
The supply fails to meet the growing demand.
‘The competition at the global oil market is intensifying due to a surge in supply from non-OPEC+ countries, primarily the US. This is unfolding against the demand in China being far below the expected level.
‘As a result, the oil prices are dropping, spurring Saudo Aramco to offer oil to its Asian customers at a discounted price,’ says Filipp Muradyan, senior director for corporate rating at Expert RA. According to him, by offering the discounts, Saudi Arabia signals that it is no longer going to lose its sales share.
While Saudi Arabia along with other OPEC+ member states cut its production last year, the US ramped it up to 12.92 barrels per day, up 1.01mln. These figures broke the previous all-time high of 12.31 barrels hit in 2019 at the outbreak of COVID-19. But the pandemic forced the US to lower the production in 2022 through 2022. Now the production level is on the rise. In 2024, the US is poised to set a new all-time high of 13.21 barrels per day.
‘By stepping up its production, the US has depreciated crude oil. On the other hand, they are forcing Saudi Arabia to whittle down the production and therefore cut oil export revenues. Last year Saudi Arabia’s trade balance dropped 25.5%,’ says Nikolai Dudchenko. Last time the Saudi company did it in 2022 on the increase of Russian oil exports to China. Back then the prices for the Arab Heavy and Arab Medium brands were set with the largest discount to those of Arab Light since 2014, the expert notes.
Possibly the recent decision was prompted by the Saudis’ push to improve the OPEC discipline. ‘It may be the case where Saudi Arabia points to the possible threat of renewed fierce market competition. On this scenario, countries like Angola, which has recently pulled out of OPEC, will sustain damage. Saudi Arabia alone will be unable to maintain the market balance. That is why every once in a while, it has to remind the other members of the importance of discipline to balance the market,’ suggests Vitaly Gromadin, an asset manager at BCS World of Investments.
The above situation has sparked forecasts projecting the oil prices to plummet in 2024. In an interview with FT, Russian businessman Oleg Deripaska said the global oil prices would fall a further 20% from the current $76 per barrel down to $60 per barrel. Deripaska explains the expected drop, first, by the steady oil supplies from non-OPEC+ countries and, second, by global economic uncertainty.
$60 per barrel is too low of a price both for Saudi Arabia and Russia. Experts estimates $80 to $90 per barrel to be the optimal price for the Saudi budget. Russia is interested in roughly the same Brent price or at least no less than $75 so that the discounted Urals price is not lower than $60 per barrel that the budget expects to be the target price level.
However, economists are far more optimistic than Oleg Deripaska in their oil forecasts.
The situation can turn on a dime, for example, if things get heated in the Middle East, says Filipp Muradyan.
The Middle East tensions are still a big issue. ‘The Houthis striking at the tankers in the Red Sea are still a big challenge. These concerns have been echoed by the U.S. Navy as they claim that Operation Prosperity Guardian is set to protect the ships navigating the troubled route, but every single cannot be patrolled. In other words, the companies have to act at their peril, which certainly does not fuel any optimism. Bypassing Africa, according to the Flexport estimates, adds 25% more time to the itinerary,’ Nikolai Dudchenko indicates. He believes that the Brent crude oil price is capable of staying over the $70 per barrel mark.