Oil price faces fresh downturn as Russia, Saudi Arabia tussle in Europe

LONDON — A sales push by Saudi Arabia into north Europe's refineries, a step into rival Russia's backyard, piles fresh pressure on oil prices already struggling against oversupply.

Stung by Russia's success in supplanting it in the giant Chinese market, Riyadh has embarked on a charm offensive in Europe, cutting its prices for December by more than it has in any other region to their lowest since 2009 during the financial crisis.

Saudi Arabian barrels rarely venture north of the Mediterranean, into the home turf for Russian, African and North Sea crudes. 

As a result, the kingdom's success in luring away buyers of rival Russian Urals crude in Poland and Sweden is having an outsized knock-on impact on the market for a wide range of other crudes in the region.

Refiners averted a price drop from a similar build up of surplus oil in spring, snapping up cheaper crude to feed a surge in gasoline demand.

But this time there is a glut of refined fuel too. The crude surplus is matched by an overhang in oil products which means refineries will not be able to come to the rescue by absorbing the extra.

"The first half of next year looks like a distinctly dangerous period for oil bulls," brokers PVM Chief Executive David Hufton indicated in a note. "It could be the period when tank tops are reached, leading to a price meltdown."

Homeless barrels are again collecting in the Atlantic market, this time dragging crudes of all kind into a price war that is making $50 a barrel an increasingly impenetrable barrier for benchmark Brent futures.

"There isn't any denying that the fundamentals are pretty bearish," said Citi analyst Chris Main. "You've got an overhang of cargoes, and it will weigh on the benchmark."

Saudi Arabia's fresh European sales have displaced only a small amount of Urals, a heavy grade that has not faced much threat from the year's excess that has centred on lighter US shale oil. But they suggest a new front in the battle for market share between the two giant producers.

Saudi Oil Minister Ali Al Naimi on Sunday said demand for oil worldwide would soon reflect the attractiveness of current prices, noting Asia as key to the growth.

Urals heads east

Russia's post-Soviet high of 10.78 million barrels per day (bpd) of oil production helped triple the discount of Urals versus dated Brent in just three months to reach 17-month lows.

And as Iran prepares to ramp up sales when and if Western sanctions are lifted next year, the overhang is only likely to aggravate further.

Discounted Urals cargoes are now muscling out British Forties crude, the largest of the four North Sea streams that make up the dated Brent benchmark.

At least three of the seven supertanker (VLCC) fixtures booked from the North Sea to Asia in November are loading Russian, rather than the North Sea crudes that typically sail.

"What is amazing is to see Forties is still pretty weak despite all the barrels that are going to the Far East," Petromatrix analyst Olivier Jakob said. "If we did not have those VLCCs going to Asia, it would be a bloodbath."

Forties price differentials are close to their lowest in five months, having traded at a discount to the dated Brent benchmark more often in 2015 than at any time in the last 20 years, and differentials for a string of crude oil grades now stand at multimonth lows.

Azeri crude price differentials have also more than halved over the past month to an annual low, while premiums for Nigeria's Qua Iboe have also lost half their value.

A physical excess of more than 60 million barrels of Nigerian oil, and North Sea output at two-year highs, along with nearly full diesel, gasoil and jet fuel tanks in Europe that have already pushed cargoes into floating storage, will only add to the pressure.

Separately, the oil and gas minister of Oman didn't pull any punches at ameeting this week after the United Arab Emirates (UAE) said it would increase its oil production despite low worldwide prices, 

"This is [a] man-made crisis in our industry we have created. ... And I think all we're doing is irresponsible," Mohammed Bin Hama Al Rumhy said as his Emirati counterpart forced a smile next to him.

Even among friends, the bottoming-out of oil prices, which are down more than 50 per cent since the middle of last year, has strained budgets and relationships alike across the Gulf and other oil-producing countries.

And while Emirati officials at the annual Abu Dhabi International Petroleum Exhibition and Conference said Monday they believed prices will head back up into next year, others offered a more pessimistic view.

"It's a movement of an era of scarcity to one of abundance; it's a movement from a world of unexpectedly strong demand and tight supplies to a world of ample supplies, even oversupplies, and weaker demands," said Daniel Yergin, vice chairman of IHS and the author of a Pulitzer Prize-winning book on the history of oil.

"OPEC's not the only balance of the market. The United States is back in the role of swing producer, a role it hasn't exerted in six decades," he indicated.

Fluctuating oil prices are nothing new, but this time the US has found itself roaring back into the industry with the mass production of shale oil and reduced dependence on imports.

US shale, a weakening economy in China and other factors have pushed prices down. 

On Monday, Brent crude, a benchmark for international oils, was at $47.63 in London, down from well over $100 a barrel last year.

While the US production has dialed back due to low prices, even more oil will soon enter the market, including an expected flood of Iranian exports once sanctions are lifted under a landmark nuclear deal.

Despite that, the Emirati energy minister said he believed prices would rise in 2016, even as his country planned to ramp up production to 3.5 million barrels of oil a day from a current 2.9 million.

The Emirates was the world's sixth-largest oil producer in 2014, according to the US Energy Information Administration. 

That 3.5 million barrel production will come in the "next two to three years", said Abdulla Nasser Al Suwaidi, the director general of the Abu Dhabi National Oil Co.

"We are hopeful that we will see in 2016... a correction," Emirati Energy Minister Suhail Mohammed Al Mazrouei said. 

"Don't ask me how big, that's for the market to decide. Don't ask me who is going to play that role. It's not going to be OPEC only. This is an international effort. Everyone has a role to play," he added.

But speaking in Qatar at the same time, Saudi Prince Abdul Aziz Bin Salman Bin Abdul Aziz, deputy minister of petroleum and mineral resources, cautioned against making too many cuts amid the swing in prices.

"As we saw back in 2008, high oil prices proved to be unsustainable, and the price fell sharply following the great financial crisis. But this works in the opposite direction," the prince said, according to a copy of his speech carried on the state-run Saudi Press Agency. 

"A prolonged period of low oil prices is also unsustainable, as it will induce large investment cuts and reduce the resilience of the oil industry, undermining the future security of supply and setting the scene for another sharp price rise," he added.

None of that placates Oman's Al Rumhy, whose country is the biggest Mideast oil producer outside of OPEC with around 1 million barrels a day. 

Oman has been highly skeptical of OPEC, led by Saudi Arabia, which has kept its own production high, further depressing prices.

"It's like you and your wife at home, cooking for 10 people and you eat a little bit and the rest of it you throw it in the dustbin," Al Rumhy said. 

"I cannot justify that, that this loss is by the grace of God. This loss is because we are not responsible. We are waiting for the cyclone that is hitting us to change course. And it will not happen," he added.

His comments drew sustained applause in Abu Dhabi, with his Emirati counterpart responding that the low prices are everyone's responsibility. 

Yet even afterward, surrounded by reporters, Al Rumhy kept up his criticism, while smiling and saying: "They're my friends."