Saudi Arabia’s problems run far deeper than trying to cobble together a deal with fellow OPEC members to curb crude oil output in order to bolster prices.
About two-thirds of Saudi Arabia’s oil exports head to Asia, and the kingdom’s struggles in the region’s two biggest importers, China and India, are symptoms of its wider issues in crude markets.
While Saudi Arabia has been increasing the total volume of crude it ships to China and India, it has steadily been losing market share, something that is likely of deep concern given that much of the current and future growth of oil demand is dependent on these two countries.
Saudi Arabia is likely going to have re-think its long-standing practice of selling oil via fixed contracts and embrace a move to a far larger proportion of spot cargoes and flexible pricing.
In the first 10 months of the year, China imported 42.72 million tonnes of oil from Saudi Arabia, equivalent to about 1.03 million barrels per day (bpd).
This represented an increase of 0.67 percent from the same period in 2015, in other words Saudi Arabia’s exports to China are largely steady.
The problem is that China’s total oil imports are up 13.6 percent in the first 10 months of 2016, and all of Saudi Arabia’s competitors have been cashing in.
China’s imports from Russia have gained 27 percent to 42.83 million tonnes, slightly more than those of Saudi Arabia and making Russia the top supplier.
China’s imports from Iraq have gained 14.7 percent, those from Iran 15.7, from Angola 12.1 percent and Oman 8.1 percent.
Saudi Arabia’s share of China’s oil imports was 13.7 percent in the first 10 months of the year, down from 15.1 percent in 2015, while Russia’s share has gained to 13.7 percent from 12.6 percent.
It’s not much better for Saudi Arabia in India, Asia’s second-biggest oil importer.
Saudi Arabia supplied 830,400 bpd to India in the first 10 months of the year, up 6.8 percent from the same period in 2015, according to data compiled by Thomson Reuters Supply Chain and Commodities Research.
The problem is that Iraq supplied 783,900 bpd in the first 10 months, up 24 percent, while Iran shipped 456,400 bpd, up a massive 114.6 percent as the Islamic Republic returned to the market after the lifting of Western sanctions against its nuclear program.
In the first 10 months of the year, Saudi Arabia’s share of Indian imports was 19.4 percent, down from 19.7 percent in 2015.
Iraq’s share was 18.3 percent in the first 10 months, up from 16.1 percent in 2015, while Iran’s was 10.6 percent, surging from 5.2 percent in 2015.
ARAMCO NEEDS TO CHANGE STRATEGY
It’s clear that Saudi Arabia is struggling with market share in the two biggest importers in Asia, but this begs the question as to why and what can the kingdom do about it?
It may be time for Saudi Aramco, the state-owned oil company, to have a radical re-think about how it markets and sells its crude.
Currently the Saudis overwhelmingly use term contracts to supply major customers, using an official selling price, which is calculated by using the Dubai market structure, recommendations from customers and changes in the value of refined products.
While customers can somewhat vary the amount of crude they buy under the term contracts, there is very little scope to buy Saudi crude on the spot market.
In fact, the Saudis are believed to have canceled a rare offer of spot cargoes in early October in expectation of an output cut by OPEC, Reuters reported on Oct. 7, citing five sources with knowledge of the matter.
The relative inflexibility of Saudi Aramco’s marketing of its crude oil may well be hindering its efforts to grow, or even maintain market share in Asia.
If a Chinese or Indian refiner decide they want to buy additional crude to what they have contracted, they can either ask the Saudis to supply more or they can go to the spot market.
It’s probably far easier to go to the spot market, and most likely cheaper as well.
Because of the way the Saudis set their OSP, additional demand from refiners feeds into a higher price for the following months, as the OSP responds to the increased demand.
Buying crude in the spot market doesn’t necessarily push the Saudi OSP higher, therefore refiners have an incentive not to ask Aramco for additional cargoes.
The purchase of oil for strategic storage by China, with some by India as well, also argues against the current Saudi strategy, as buyers will want maximum flexibility to purchase when they deem prices to be cheap, or when the storage tanks become available.
Saudi Arabia’s major competitors in Asia appear to be far more flexible in supplying oil, particularly Russia, which may go some way to explaining why China is buying increased volumes from its northern neighbor.
Overall, no matter what happens at the OPEC meeting on Nov. 30, Saudi Arabia is likely to continue to struggle to maintain its market share among Asia’s top importers.
It’s hard to change the habits of a lifetime, but it seems Saudi Aramco’s marketing and pricing system is doing the company no favors in a world where buyers have an increasing choice of crude suppliers.