Saudi oil price cuts ‘fly in the face’ of deal to limit OPEC output

Probability of OPEC deal 50/50: Analyst
Probability of OPEC deal 50/50: Analyst

Saudi Arabia's decision to cut prices for some of its oil exports is raising serious questions about the kingdom's commitment to limiting production, analysts said.

Members of the Organization of the Oil Exporting Countries tentatively agreed last week to reduce crude supply. That effort to stabilize prices marked a change in course for top oil exporter Saudi Arabia and other producers, which had been cutting selling prices in order to grab market share over the course of a two-year oil downturn.

But on Wednesday, the kingdom's state oil giant, Saudi Aramco, appeared to move away from the idea of price stabilization when it said it was lowering the cost of Arab Light and other crude products for November delivery to Asian customers, Reuters reported.

"It does fly in the face of the agreement. It's just another thing that belies the agreement and the prices we're at right now," John Kilduff, founding partner at Again Capital, told CNBC on Wednesday after crude futures hit highs going back to June. "It makes me think they're not serious about any cutback agreement."

In Kilduff's view, Saudi Arabia is likely to continue competing aggressively for share as regional rival Iran claws back much of its crude export volume after the end of international sanctions against the country this year.

Trading Nation: Crude oil approaches $50
Trading Nation: Crude oil approaches $50

The Saudis have grown more creative in managing oil markets and putting a floor under prices, said Tamar Essner, senior director of energy and utilities at Nasdaq Corporate Solutions. They demonstrated this first by talking up a deal to freeze output that they later scuttled at a special meeting in April, and just last week by delivering an agreement to cut production that was short on details but nevertheless helped prop up crude futures, she said.

"The decision to 'agree' to anything without commitment from Iran is a departure, and it shows that the exclusive focus on market share has probably run its course in terms of effectiveness, but today's news on price cuts shows that they will continue to flex their muscle as one of the largest and lowest-cost producers," Essner told CNBC on Wednesday.

Ahead of the surprise agreement, Saudi Energy Minister Khalid al-Falih said that Iran, Libya and Nigeria may be allowed to pump "at maximum levels that make sense," Reuters reported.

To be sure, the Saudis did not cut their official selling price as much as the market anticipated, and the cost does regularly fluctuate as Riyadh attempts to price its product to accommodate its refining customers' margins, according to Andrew Lipow, president of Lipow Oil Associates.

A Thomson Reuters survey showed four refiners anticipated the price of Arab Light to fall by 20 to 50 cents a barrel. Saudi Aramco dropped the cost of its flagship product by 25 cents.

Still, Wednesday's price reduction does raise questions, Lipow said.

"Clearly, it is inconsistent with the Saudis claim that they're going to cut production in the future, because one would think if you're going to cut production you don't have to cut your crude oil price very much," he told CNBC.

The Algeria meeting ended with an agreement to discuss a plan to cut production by 200,000 to 700,000 barrels a day at OPEC's annual meeting on Nov. 30, opening the possibility that members will continue to scramble for market share before finally agreeing to production caps.

"We still have two months of rapid free-for-all," Lipow said.

The OPEC pact, agreed to after a special meeting of cartel members in Algiers, has already faced challenges. Iraqi oil Minister Jabbar al-Luaibi has warned his country may walk away from any deal if it does not agree with the way OPEC assesses current production, The Wall Street Journal reported.

OPEC collects output figures both from member countries and secondary sources. Iraq, the cartel's second-largest producer, worries that if production quotas are based on secondary information, it will be forced to slash output more than it believes is fair.

"I think there's a very good chance that [the deal] gets derailed. The production cuts involve countries like Iraq and the Emirates who probably are not very excited about cutting their production," Lipow said.