Saudi Arabian Oil Minister Ali al-Naimi talks to journalists before a meeting of Opec ministers at its headquarters in Vienna on November 27. Al-Naimi warned his fellow Opec members they must combat the US shale boom.

Reuters

Singapore

An aggressive strategy by Mideast Gulf producers to exploit the lowest oil prices in five years to defend market share is showing signs of bearing fruit as US crude exports to Asia grind to halt.

Asian refineries have suspended imports of condensate, a light crude oil produced from the US shale boom, just four months after they began in favour of cheaper Middle East grades, according to trade and industry sources.

The suspension illustrates how competition between suppliers has heated up following a more than 40% decline in oil prices since June.

Last week Ali al-Naimi, the oil minister of Opec leader Saudi Arabia, warned his fellow Opec members they must combat the US shale boom. He argued against cutting Opec production so as to keep prices depressed and undermine the profitability of North American producers.

“There’s so much oversupply that Middle East crudes are now trading at discounts and it is not economical to bring over crudes from the US anymore,” said Tushar Tarun Bansal of consultancy FGE in Singapore.

US oil became uncompetitive against similar grades from Qatar, Saudi Arabia and the UAE after Gulf producers began dropping prices in August to maintain their market share in an oil market glut.

Crude oil prices have fallen more than 40% since June and the market tumbled further last week after Opec, largely led by its Gulf members, decided at a meeting in Vienna against cutting output in order to support market share instead of prices.

Middle East crude currently accounts for about two-thirds of Asia’s imports.

Adding to pressure on US crude exports to Asia, freight rates from the US to Asia have risen by 50%, forcing sellers to market their cargoes to Europe instead. This is partly due to higher demand for ships in the Middle East and Africa.

The US eased a 40-year-old ban on crude exports last year in the wake of its shale oil boom, opening up new trade routes for surplus flows to Asia and Europe this year.

US exports of lightly processed condensate, also known as light oil, started arriving in Asia in August and exports doubled to about 600,000 barrels in October.

Royal Dutch Shell bought the last cargo coming to Asia, due to arrive at its Singapore refinery in December, but as a result of the price shifts no more cargoes are expected to head east for at least the next two months, three traders who specialise in the market said.

The pressure could undermine plans to send further US condensate to Asia. BHP Billiton Ltd and Enterprise Products Partners have both issued tenders to sell condensate next year.

Trading house Vitol, which bought the latest US condensate cargo to load in December, is likely to send it for use at its Swiss refinery instead of Asia, trade sources said.

Vitol does not comment on its trading activities and Shell declined to comment.

Although US light crude exports to Asia may have stalled for the moment, analysts say the new trade route is not necessarily dead for good.

“Opec could still act in 2015, especially if prices fall too far (and) lower prices may spur non-Opec exporters into action,” Morgan Stanley said in a research note.

“Lower prices may only force US producers and service companies to innovate even faster, pushing down the cost of production,” the US bank added.