As Saudi Arabia goes on a shock and awe attack to curb a global oil glut, it’s also playing defense to hold on to its most prized customers.

The kingdom is largely sparing Asia from reductions in crude sales, at least for now. That’s amid the threat of more U.S. and European supply coming to the world’s biggest market, as Saudi-led production cuts have boosted the Middle East oil benchmark relative to other regions. Also, crude’s surge risks reviving shale output while American shipments are already making their way to countries including Thailand, Japan and South Korea.

While OPEC’s biggest member could yet curb some volumes to Asia in coming months, it’s unlikely to completely abandon the battle for market share even as it changes tack from its pump-at-will policy of the past two years.

It’s counting on regional refiners’ inability to completely switch over to rival supply, as their plants are geared to process ‘sour’ sulfurous crudes like those produced by Saudi Arabia rather than ‘sweet’ shale or North Sea oil. It can afford to cut sales more significantly in other places that aren’t as valuable as Asia.

“Now that Saudi Arabia has committed to such large production cuts, it’s important for them to retain market share in the region where they see the most growth potential,” said Peter Lee, a Singapore-based analyst at BMI Research, a unit of Fitch Group. “In Asia, we still have India and China where Saudi Arabia is vying for market share. It makes sense for them to concentrate on the region and try to keep buyers happy.”

Curbed Shipments

The world’s biggest crude exporter was last week said to have started telling customers it will reduce crude shipments from January, with the curbs focused on Europe and North America. By contrast, at least five refiners in Asia said they have been told they will receive normal volumes under long-term contracts next month. Three of them were told they would receive extra supply they requested. State-run producer Saudi Aramco had also cut pricing for oil sales to Asia for the month.

On Saturday, the Middle East kingdom signaled it’s ready to cut oil production more than expected, in a move described as “shock and awe” by Amrita Sen, chief oil analyst at industry consultant Energy Aspects Ltd.

“With Aramco now trying to bring an IPO to the stock market, I think this is what they needed and if they have higher revenues, it will stabilize their financial situation at least for some time,” said Ehsan Ul-Haq, an analyst at KBC Advanced Technologies. “The market will take some time to stabilize but balancing of the market will result in gradual recovery.”

The planned reductions have strengthened benchmark Dubai crude against U.S. marker West Texas Intermediate, with Middle Eastern producers pledging the majority of the output cuts. WTI was just $0.12/bbl more than Dubai earlier in December, compared with an average premium of $1.35 over the past two months.

The Brent-Dubai exchange for swaps, a measure of the difference in prices between the two benchmark crudes, averaged $2.11/bbl in November, the smallest in more than a year, enhancing the affordability of African and Mediterranean grades that are typically priced off the North Sea marker. Even before producers announced the planned reductions, the attractiveness of crude linked to WTI and Brent have prompted shipments to Asia.

“I don’t think the Saudis can afford to cut volumes to their biggest customers,” said Mukesh Kumar Surana, chairman of state-run Indian refiner Hindustan Petroleum Corp. “There is dependence on both the sides. The Saudis need us as much as we need them.”

The Asia Pacific region will use 32.88 MMbopd this year, accounting for more than a third of global consumption, data from the International Energy Agency show. Daily demand is forecast to expand to 33.7 MMbbl in 2017. In the Americas and Europe, oil use is seen staying flat next year, according to the Paris-based IEA.

Saudi Arabia’s energy minister, Khalid al-Falih, said on Saturday he didn’t expect a big supply response from American shale producers in 2017. Goldman Sachs Group disagrees. U.S. producers can achieve 800,000 bpd of annual production growth at a price of $55/bbl for WTI, it said in a report.

“What the Saudis want to do is to ensure that they don’t get flows from secondary suppliers coming in from other markets into Asia,” said John Driscoll, the chief strategist at JTD Energy Services Pte, who has spent more than 30 years trading crude and petroleum in Singapore. “This is probably why they have reportedly curtailed sales into the U.S. so that the U.S. marginal barrel stays in the country, rather than get exported.”

Source: www.reuters.com