Crude Economics
Saudis Dig In for Intra-OPEC Price War

Saudi Arabia’s state-owned oil firm Saudi Aramco is cutting prices and selling its crude to Europe at a discount. The WSJ reports:

[S]tate oil company Saudi Aramco said it had cut its light crude prices by 35 cents a barrel to northwest Europe and by 10 cents a barrel to the Mediterranean for July deliveries. The price reduction is surprising, as demand typically grows in the second half of the year as refineries return from maintenance. In addition, markets have recently been buoyed by outages in countries like Nigeria.

This isn’t the first time that Saudi Arabia has discounted its crude since prices tumbled from their $115 high two years ago—last fall Saudi Aramco cut its prices for Asian customers in an attempt to protect its share of the crowded global market. Now, as the WSJ details, Riyadh is extending those discounts to Europe in order to compete with (guess who) Tehran:

Shipments from Iran to the EU have now reached 400,000 barrels a day. They are set to increase to 700,000 barrels a day in the coming months after Iran clinched deals with Greek, French and Italian refiners, according to Iranian officials.

By contrast, Saudi Arabia exported 800,000 barrels a day on average to Europe last year, according to the International Energy Agency. As a result, Saudi Arabia and Iran have been matching each other’s price cuts, though they deny offering special, private discounts to individual buyers.

Iran has already managed to boost its oil output to 2011 levels, back before Western sanctions were tightened, and it has plans to keep this resurgence going in the coming months. Its insistence on regaining market share lost due to sanctions ultimately sank talks amongst petrostates to freeze production levels and prevented OPEC from reaching any agreement on coordinating production at the cartel’s semiannual meeting last week.

For both geopolitical and economic reasons, Iran’s return to preeminence as one of the world’s major oil exporters is a major challenge to Saudi Arabia. Oil market competition is heating up between the two regional rivals, and this recent discount could presage further price cuts. With a potential oil price war on the horizon, it’s a good time to be a buyer.

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