Opec price war in Asia intensifies as oil falls below US$50

[SINGAPORE] Even as Saudi Arabia and its Gulf Opec allies appear united in their refusal to cut output to boost global oil prices, they are becoming locked in an increasingly fierce battle to secure market share in Asia.

Oil prices have slumped below US$50 a barrel, the weakest since 2009, triggering a price war between producers to secure customers in Asia. And the price outlook remains grim with Goldman Sachs slashing its three-month benchmark crude forecasts to just above US$40.

The United Arab Emirates (UAE) last week joined Kuwait and Iraq in pricing crude they sell to Asia below that of Opec's top producer Saudi Arabia.

The discounts show how Gulf members, who account for more than half of Opec output, are prepared to take on each other to retain market share and, in so doing, put more pressure on global oil prices.

"It's a fight for the market," said Tushar Bansal of consultancy FGE, who says Gulf producers such as the UAE are prepared to stomach lower prices to hold their market share.

The UAE's Abu Dhabi National Oil Company (ADNOC) set the official selling price (OSP) for flagship grade Murban in December at a discount to similar quality Saudi's Arab Extra Light for the ninth month in a row, data from Reuters and trade sources showed last week.

This was despite Saudi Arabia raising its prices to customers in Asia after sharp reductions in previous months.

ADNOC had felt it had to reduce prices to ensure its crude remained attractive to Asian refiners, a source familiar with their strategy said.

Goldman Sachs has lowered its average 2015 price forecast for benchmark Brent and WTI futures to US$50.40 and US$47.15 per barrel, respectively.

The US bank cut its three-month price forecast for Brent to US$42 from US$80 and US crude to US$41, down from US$70, adding it would need to stay near US$40 for most of the first half of 2015 before it would hold up shale oil investments.

"To keep all capital sidelined and curtail investment in shale until the market has rebalanced, we believe prices need to stay lower for longer," its analysts said in a report.

As well as targeting North American shale, oil ministers from Opec, including the UAE, have called for exporters, such as Russia, to cut output to lift prices. Russia, in turn, wants Opec and Saudi Arabia in particular to cut production first.

Over the past decade, UAE's Murban OSP has been on average 15 cents a barrel higher than Saudi's Extra Light OSP, but the relationship between the grades switched since April last year, the data showed. In September, Murban was priced at the widest discount to Extra Light in over a decade at US$2.28.

Another Abu Dhabi grade, Upper Zakum, also flipped into a discount against Saudi's Arab Medium in December, even though Upper Zakum has been priced at an average premium of US$1.11 a barrel above the Saudi grade in the last decade.

ADNOC sets its prices two months behind those of Saudi, Kuwait and Iraq, which gives the UAE's main producer more time to react to market changes.

The UAE, Opec's fifth largest producer, has been expanding its output and remains on track to boost production capacity to 3.5 million barrels per day by 2017, up from about 2.8 million bpd, its oil minister said in remarks published last week.

The UAE's price cuts have spurred demand for Abu Dhabi grades in the spot market, with Taiwanese refiner CPC Corp buying volumes of Murban crude at the start of the year.

But Bansal of consultancy FGE warned that to restore market balance output cuts will have to come from Opec and non-Opec producers. "If no one blinks, then prices will continue to drop."

REUTERS