OPEC’s plan to keep oil prices low and price out U.S. shale oil production is completely backfiring as member states of the global oil cartel are undercutting each other to increase their market shares.
Iraq and Kuwait are undercutting Saudi Arabian crude oil prices to increase their market shares in Asia, reports Oil & Gas 360 based on data compiled by Bloomberg News. Kuwait is selling its oil for 65 cents a barrel cheaper than Saudi oil and Iraq is selling its heavy grade crude for $3.70 per barrel below Saudi heavy crude.
Qatar is undercutting Abu Dhabi’s price for crude oil by $1.20 a barrel.
“It’s a full-on fight for market share within OPEC,” Virendra Chauhan, an oil market analyst at Energy Aspects Ltd., told Bloomberg. “That’s even as the group tries to fend off a rise in non-OPEC production from countries such as Russia, Brazil and the U.S.”
OPEC’s strategy since late 2014 has been to keep production levels high to keep oil prices down and suppress crude production in the U.S., Canada and Russia.
Ideally, the cartel would act in concert, but it appears cracks are forming in resolve and some members are trying to expand their own sales by undercutting Saudi Arabia — OPEC’s largest oil producer. The Saudi’s have also been reducing prices to sell more oil to Asian buyers.
The Asia-Pacific region is “expected to account for 34% of global oil demand in 2015,” reports Oil & Gas 360, adding that “China alone will make up more than 25% of consumption growth next year as it looks to fill its strategic reserves with cheap crude.”
But increased competition from fellow OPEC members can’t come at a worse time for Saudi Arabia. The country’s finances are wrecked by low oil prices, endangering the government’s ability to fund its vast welfare state.
The Kingdom is seeing record-low oil export revenues and is forced to tap into its financial reserves to plug its widening budget gap. The International Monetary Fund (IMF) warns that Saudi Arabia could burn through its financial reserves within five years if oil prices continue to hover around $50 a barrel.
“Achieving fiscal stability over the medium term will be especially challenging given the need to create jobs for the more than 10 million people anticipated to be looking for work by 2020 in the region’s oil-exporting countries,” according to the IMF.
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