Saudi Arabia, until recently the world’s top oil exporter and still de facto OPEC leader, is feeling pressure. Its top exporting customer of nearly four decades, the US, has become its greatest competitor. Amid the shale oil boom and the wonders of hydraulic fracturing (fracking), the US is now producing over 9 million barrels of crude oil per day, while last year it passed both Saudi Arabia and Russia as the top global oil producer on a total liquids basis.
US crude oil production set yet another record in 2014, according to a March 30 report by the US Energy Information Administration (EIA). US crude oil production (including lease condensate) increased by 1.2 million b/d to 8.7 million b/d – the largest volume increase since recordkeeping began in 1900.
To make matters worse, at least for the Saudis, the US is also cutting back on Saudi crude oil imports, while the price of crude oil has fallen by nearly 60 percent since mid-June. Although the Shell-Saudi Aramco Motiva refining venture guarantees the Saudi’s will maintain a foothold in the US downstream market.
As the US shale oil story unfolds, the Saudis have been forced to act, maneuvering their own Asian pivot in efforts to make up for lost market share in the US — eying the world’s second and third largest oil importers, China and Japan as well as South Korea.
However, even the Saudi’s market share in Asia – its largest market for crude oil — is under attack from other crude suppliers, including Iraq, West Africa, Colombia and Venezuela, while these competitors have been making steady inroads in Asia the last few years and reducing Saudi Arabia’s market share, global energy consultancy Wood Mackenzie said this week.
If Saudi Arabia were to maintain its current crude oil export volume of 227 million tons to Asia, by 2020, its market share would drop from 23 percent to 21 percent, Wood Mackenzie said. This would in effect mean lost market opportunity for Saudi Arabia from Asia’s 135 million tons of incremental crude oil import potential by 2020.
In a move that is sure to cause displeasure for Saudi energy planners, particularly in today’s low price oil environment, Saudi Arabia is being forced to take action by providing price discounts in order to keep prices competitive and retain their market share in Asia. The Saudis really have no choice. Asia’s share of Saudi crude exports has risen from 60 percent in 2006 to about 65% in 2014.
However, even crude oil demand growth in Asia may be slowing, at least in the short to midterm, particularly from China. Earlier this year, Chinese state-owned oil major CNPC said that oil demand in the country will grow 3 percent year-on-year to 534 million metric tons in 2015. In 2014, oil consumption grew by 3.3 percent to 516 million tons.
China’s recent economic slow down adds to the problem. After three decades of robust economic growth – annual increases of roughly 10 percent – China’s economy grew at just over 7 percent last year. Earlier this week, economists estimated that the country’s economic growth in the first quarter of the year will fall below 7 percent, which will correspondingly reduce China’s oil consumption and oil import demand.
China, for its part, can easily manage at a still impressive economic growth rate of nearly 7 percent. However, it’s more problematic for Saudi crude oil exports. Yet, the Kingdom seems to have already anticipated hard times ahead. Saudi Arabia will soon become a major player in the oil refining sector.
In February, Saudi Arabia’s oil minister said the Kingdom plans to become the world’s second-largest exporter of refined oil products in 2017 as part of its drive to diversify its economy and increase its share of the global crude and petroleum products markets. This year, Saudi Arabia’s two new refineries will add 800,000 b/d of refining capacity, while another planned refinery will add 400,000 b/d capacity for a total of 3 million b/d of capacity. The problem soon, however, won’t be just finding customers for Saudi crude, but for its refined oil products too amid a glut of finished products.
