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Saudis Losing Oil Price War

Saudis Losing Oil Price WarSaudis Losing Oil Price War

Saudi Arabia's policy of keeping production levels abnormally high and driving out US shale producers simply has not worked.

Even as US shale hedges are about to expire, some of the imminent bankruptcies would not result in wells getting abandoned, it would only result in cheaper acquisitions of bankrupt companies by their much bigger competitors.

Once oil prices again rise to $60 per barrel levels, the bigger oil companies would naturally ramp up their production levels that would in turn increase US crude oil production, Business Intelligence reported.

Thanks to its generous public spending and a costly war against Yemen, one of the major worries for Saudi Arabia is that it is burning through its foreign reserves at an alarming pace. According to the IMF, Saudi Arabia's fiscal deficit could rise to around $140 billion by the yearend.

"It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short run. The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience," said a recent stability report by the Saudi Central Bank.

From all this, it seems that the Saudis are now getting beaten in their own game and have been trapped in the oil price war that they themselves created.

When we look at the refining sector, we see that the oil kingdom has been flooding the markets with refined fuel. The Saudis have already sparked an oil price war with the Asian refiners downstream by offering close to 2.8 million barrels of low sulfur diesel to the European and Asian markets.

This has caused Asian refining margins to fall drastically, the effects of which can ironically now be seen on Saudi Arabia itself.

Saudis are now reducing their crude oil price hikes in Asia to save their market share.

As the refining margins have fallen in Asia, refiners there have been compelled to cut their refining outputs. This could eventually result in refiners cutting their crude oil imports.

Asia has been one of the biggest cash cows for Saudi Arabia and there have already been some cuts in some of the most crucial markets. India, which was earlier importing most of its crude oil from Saudi Arabia, is now changing its strategy and buying more crude oil from Nigeria, Iraq, Mexico and Venezuela.

 

Financialtribune.com