Saudi Arabia offers crude discounts to hold market share with Asian refiners

Global consultancy Wood Mackenzie says Saudi Arabia is taking steps to protect its market share in Asia -- its largest market for crude oil exports. 

Saudi Arabia is forced to act, as other crude suppliers have been making steady inroads in to Asia in the last few years and reducing Saudi Arabia’s market share, according to Wood Mackenzie.

If Saudi Arabia were to maintain its current crude oil export volume of 227 million tons to Asia, by 2020, its market share would reduce from 23% to 21%, the consultants report.

More importantly, this would mean a lost market opportunity for Saudi Arabia from Asia’s 135 million tons of incremental crude oil import potential by 2020.

Wood Mackenzie says Saudi Arabia is forced to take action by providing price discounts in order to keep prices competitive and retain their market share in Asia.

“Asia is the largest market for Saudi Arabia’s crude oil exports," said Sushant Gupta, head of Asian downstream research at Wood Mackenzie. "Asia’s share of Saudi crude exports has risen from 60% in 2006 to approximately 65% in 2014. Clearly, it is important for Saudi Arabia to protect its market share in Asia. 

"However, competition has intensified and Asia now has more options to source crude oil supply," he said.

Addressing who the competitors for Asia’s market share are, Gupta says: 

“Iraq has emerged as the largest competitor. Our analysis shows it has been most successful in increasing its share of Asian crude supply, with exports rising most by 30 million tons from 2010 to 2014. This is followed by Russia, whose supply increased by 21 million tons, and then United Arab Emirates (UAE) by 20 million tons during the same period."

Other emerging competitors include Latin America (Colombia and Venezuela) and West Africa. Saudi Arabia only increased its export volumes to Asia by 12 million tons in comparison, Gupta said.

“Furthermore, an increase in US tight oil production has altered the crude trade flows in the last four years," Gupta said. "The US has increased its heavy crude imports from Canada backing off crude volumes from Latin America. Similarly, higher use of domestic tight oil resulted in the re-direction of West African crude supplies. As such, these suppliers have turned to Asia, providing more options for Asian refiners."

As a result, Saudi Arabia has preferentially lowered crude prices for the Asia-Pacific after announcing its intention to compete for market share in Asia.

“The official selling price (OSP) for Arab Light to Asia, which is the premium or discount to average of Oman and Dubai, has traditionally been at a premium until September 2014," said Gupta. "With progressive discounts, Arab Light OSP for Asia reached its largest discount of $2.30/bbl in March 2015, this means Arab Light’s price to Asia is at its lowest level in more than a decade. 

"Without the OSP discount, Arab Light would not be competitive with other crude grades available for Asian refiners such as ESPO blend and Bonny Light – Russian and Nigerian crude respectively -- as these crudes provide refiners with higher margins," he continued.

“Saudi Arabia had to cut its price in Asia to ensure its crude oil remained attractive to the region’s refiners. Hence, having competitive prices will be an important mechanism that Saudi Arabia would be adopting to secure its market share. Other suppliers looking to position themselves in Asia will have to pay close attention to the Saudi's pricing strategy for Asia. 

"Meanwhile, Asian refiners are set to benefit from this competition.”