Saudi Arabia And Russia Snarling Over Oil Market Share As OPEC States Fear Cash Drain

Saudi Arabia is dropping its pants for oil price advantage to unseat Russia as the dominant supplier in Europe. This decision is happening before the meeting on Friday, November 4, 2015, by the Organization of the Petroleum Exporting Countries (O.P.E.C.) barely a year after a Saudi-led move not to prop up prices.

Saudi Arabia and Russia are the world’s two biggest players, both producing more than 10 million barrels of oil a day. According to The Wall Street Journal, their production levels are mainly instrumental to a global glut keeping prices below $50 a barrel.

With Iranian competition glimmering on the horizon with the expected lifting of sanctions by its nuclear deal, both Saudi Arabia and Russia are doubling down on securing slices of the European pie.

Saudi Arabia represented by Oil Minister Ali Al Naimi, made a significant move toward Europe by supplying Sweden’s largest refiner, Preem AB, in November, following Saudi oil shipments to Poland’s refining companies, PKN Orlen and Lotos, for entry into Eastern Europe. A Saudi plan to store crude in Poland’s Gdansk on the Baltic Sea, will cater to Eastern European buyers. All these moves constitute a major incursion into a traditionally Russian market.

Saudi Arabian Oil Minister Ali Al Naimi [Photo via Getty Images]

There were already rumblings in October, mainly from Chief Executive Officer Igor Sechin of Russia’s OAO Rosneft, calling out Saudi Arabia for dumping oil in Europe, forcing Russian oil companies to sell their export blend, Urals, at a considerably lower price. Already selling for less than the international benchmark Brent, the Russian oil producer tripled its discount in October in the face of Middle Eastern oil pouring in.

According to The Globe and Mail, an OPEC oil glut rose in November from the previous month due to a rebound in supply from the group’s second-largest producer Iraq after bad weather delays. With renewed activity, OPEC giants such as Saudi Arabia are pumping more than ever.

Standing at 31.77 million barrels per day in November from 31.64 million in October, OPEC supply is at an all-time high. The Friday meeting wherein Saudi Arabia is a key player, is slated to address this oversupply situation.

A year after OPEC refused to prop up prices in a stalemate instigated by Saudi Arabia, the players in Friday’s meeting are expected to stand fast with this decision. Oversupply has halved the value of oil in the last 18 months, but even OPEC members open to adjustment do not expect one.

Since its November 2014 policy shift, OPEC has ratcheted up production by about 1.50 million barrels per day, not far below July’s 31.88 million bpd, the highest since 1997. Aside from Saudi Arabia, the biggest contributor to the monthly output is Iraq with the world’s fastest supply growth this year.

According to Independent, Russia’s financial stability would be threatened by an oil price drop to below $30 a barrel. Russia has adjusted to falling prices by cutting spending and a weaker currency. But it could run out of ideas if countries like Saudi Arabia prevent an oil price recovery.

Russian pipeline
Russian pipeline routing cheap oil [Photo via Getty Images]

With the price of crude currently at $42 a barrel, the $100 a barrel oil of mid-2014 has become more difficult to go back to. OPEC has asked countries like Saudi Arabia to slash their production rate and stop the pricing free fall, but the request has gone unheeded.

Russia’s rivalry with Saudi Arabia in the European arena has thrown a wet rag on OPEC hopes for a cooperative production cut before its meeting in Vienna on Friday. The price drop of more than 60 percent from the highs of 2014 will need a boost from non-OPEC countries like Russia, which is not in the mood for such a discussion.

Looming large in everyone’s mind are the large budget deficits in Iraq, Iran, Oman, Algeria, Saudi Arabia, Bahrain, Libya and Yemen. If these countries do not expand their revenue stream through diversification, the International Monetary Fund gives them five years or less to run out of cash.

[Photo via Getty Images]