Saudi Arabia Cuts Oil Prices in Europe as Iran Ramps Up Exports

June 6, 2016


Saudi Arabia on Sunday cut its oil prices to Europe, signaling mounting competition after OPEC failed to cap its output amid Iran’s exports ramp up.

In an email sent to customers, state 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.

But Saudi Arabia’s move comes after the Organization of the Petroleum Exporting Countries last Thursday failed to agree on a production ceiling. The absence of output limits effectively gives a blank check for the group’s two most influential members and rivals, Saudi Arabia and Iran, to pump at will.

Geopolitical tensions helped scotch the deal on capping production, with Iran taking a firm stand late last Wednesday against any move that would limit its own production as it aims for an economic comeback following the end of Western sanctions in January. By contrast, Saudi Arabia had expressed openness for a collective output cap.

The two Persian Gulf nations, which belong to rival sects of Islam, are jockeying for political influence in hotspots such as Yemen and Syria.

But the European price cut on Sunday also exemplifies their intense competition for oil markets. Iran resumed its crude exports to the European Union in February after an EU embargo on its oil was lifted and is now heavily competing there with Saudi Arabia, which had partly replaced Iran as a source of European supply during the sanctions.

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 believes it will ultimately have the upper hand, as its finances are less dependent on oil. “Saudi Arabia will be big loser in the price war,” Akbar Nematollahi, the head of public relations at Iran’s oil ministry, wrote last month in the ministry’s in-house magazine.

Some European oil producers could be collateral victims of the rivalry. Northern European oil producers, mostly in the U.K. and Norway, have struggled to attract new investments amid depressed oil prices.

Competition for market share has been less intense in Asia, where Iran was always allowed to sell. On Sunday, Saudi Arabia increased its light-crude prices to the Far East by 35 cents a barrel.

It also raised prices by 10 cents a barrel in the U.S., where Iran is still banned