Iraq Undercuts Saudi to Snare Asian Oil Market Share

March 19, 2013

Fast-growing oil exporter Iraq is selling its crude cheaper than any comparable supply, undercutting regional rival Saudi Arabia to grab a bigger slice of the Asian market, Reuters reports.

Three years into an oil expansion following decades of war and sanctions, Baghdad has risen to the rank of third largest supplier to China, India and South Korea - prompting Saudi Arabia to seek to safeguard its top slot.

Executives from state oil giant Saudi Aramco discussed a response to Iraq's aggressive pricing at a strategy meeting in London earlier this month, industry sources said.

"Iraq is raising its production. We have to play very smart," said a source familiar with Saudi oil marketing policy. "We don't want to hurt ourselves."

To win more customers in Asia, Baghdad has upped its pricing game - marking down Basra Light crude by $1.10 a barrel against rival Saudi Arab Medium, the lowest discount in nine years.

Saudi Arabia reacted by cutting the price of Arab Medium for two months running, a move traders and refiners said was in part to preserve the kingdom's market share.

"The Saudis are feeling it more than everyone else," a trader with a Western firm said. "It's direct competition and that is why the Saudis dropped their official selling prices big time."

Riyadh, pumping about 9.2 million barrels per day (bpd) after cutting supply sharply towards the end of 2012, may also be marking its territory ahead of OPEC's May 31 meeting in Vienna.

"The sharp price cuts and rumoured efforts to push refiners to take full contract volumes may constitute a gentle warning that Saudi Arabia is not going to forego its market share to make room for Iraq," said a senior Western oil executive.

"But this is a long-term game and the Saudis appear fairly sanguine about the overall market balance for the moment."

For their part, Iraqi oil officials do not see Baghdad in a full-on battle with Riyadh for market share.

Iraqi oil marketers want to craft a sales policy that does not jeopardise production growth that began in 2010 after Baghdad secured service contracts with the likes of BP, Eni, Exxon Mobil and Royal Dutch Shell .

"We're building a strategy to increase exports and keep our customers happy," said an Iraqi oil official. "And we're on the right track."

Already OPEC's second-largest producer after overtaking Iran, Iraq aims for average rates this year of 3.7 million bpd, up from 2.9 million bpd last year.

That would be just shy of an all-time high of 3.8 million, hit in 1979.

Baghdad's lofty output target, revealed by Oil Minister Abdul Kareem Luaibi just before OPEC's last meeting in December, did not go unnoticed by Saudi Arabia - the only producer in the Organization of the Petroleum Exporting Countries with a significant cushion of available supply.

"Luaibi's big numbers unnerved us," said a source from a Gulf producer who declined to be identified.

Global demand growth is moderating at 800,000 to 1 million bpd and