Is Middle East displacing Russia from European oil market?

A price war between Russia and the oil producers of the Middle East is becoming more intense, the International Energy Agency (IEA) said in its report.

The document notes that Iran, Iraq, Saudi Arabia and Kuwait are trying to win Russia’s traditional market. Recently, Iran began oil supplies to Poland after Saudi Arabia, the report says. Saudi Aramco, in turn, has reduced oil prices for Mediterranean Europe customers with delivery in August, and competitors from the Middle East are expected to follow suit.

In addition, in May 2016, Saudi Aramco and PKN Orlen have signed a contract for the supply of 200 thousand tons of crude oil to the Polish company's refineries every month. It is valid until December 31, 2016 with the possibility of automatic renewal. The oil will be processed at refineries in Poland, Czech Republic and Lithuania.

PKN Orlen noted that "this is the first direct long-term contract" between our company and the supplier from the Gulf region.

A leading analyst of the National Energy Security, a lecturer at the Financial University under the Government of the Russian Federation, Igor Yushkov, speaking with a correspondent of Vestnik Kavkaza, confirmed that the competition among suppliers of oil to the European market is actively developing now. "First of all, this is due to the increase in Iraq's production. The major project contributing to an increase in production is the West Qurna-2, which is developed by Lukoil. That is, to some extent it creates a competitor to Russia. It is not clear why the state company Gazprom Neft is involved in Iraqi projects. It turns out that it also competes with its major shareholder represented by the state," the expert complained.

At the same time, he recalled that in 2015, the increase in Iraq's production reached more than 20% due to these new projects. "As for Iran, in fact, it has already reached the pre-sanctions level of production. When in 2011, he supplied all of its oil to India and China, now it can supply oil to the European market as well," a lecturer at the Financial University under the Government of the Russian Federation noted.

At the same time, he emphasized the fact that for Russia is able to easily realize all the oil produced in the country on the world market. "This is including the European market. And additional volumes which are produced in Eastern Siberia are supplied to the Asian markets, China, the port of Nakhodka, Japan and other countries in the Asia-Pacific region," the expert noted.

According to him, the main problem in Russia today is to maintain production at the highest level. "In the coming years we need to invest in new developments, but due to low oil prices our investment programs are reduced," a leading analyst of the National Energy Security noted.

He also shared his opinion about advantages of the Russian oil. "There are two grades of oil in Iraq - light and heavy, which requires a large degree of processing. Speaking of heavy crude oil, the Russian oil is of better quality. At the same time, there are different oil sorts in Russia. The heavy sour oil is produced in the Volga region. But it mixes with light oil of Western Siberia in the pipe, resulting in the Urals oil mixture. But European refineries are set for such oil. Therefore, there is no danger that Saudi Arabia, Iran and Iraq will squeeze Russia out of the European market," the expert said.

In addition, he expressed doubt that competition in the European market will have a major impact on oil prices. "Oil prices are determined by the balance of supply and demand only when other factors are constant. The main factor is the Federal Reserve rate. If it raises, the loans become less available. Accordingly, the price of futures declines. Therefore, until the Federal Reserve does not change its rate, players are beginning to consider other factors - volumes of production, extractable volumes," Igor Yushkov concluded.

The president of the Union of Oil and Gas Producers of Russia, Gennady Schmal, in turn, stressed that the market itself provides for competition, adding that Russia has an advantage of reliable and timely supplies. "Therefore, European countries have already been convinced that Russia is a reliable partner," he said.

The president of the Union of Oil and Gas Producers of Russia said that Tehran has supplied oil to European refineries even during the sanctions. "In the past, Iran annually produced about 280 million tons, and recently 170 million tons. Now it needs money for the restoration of crafts, material resources, equipment, etc. According to my estimates, Iran needs about three years to reach the previous figures," he noted.

In addition, the president of the Union of Oil and Gas Producers of Russia said whether the competition between Russia and the Middle East will affect oil prices. "The Gulf countries have their own budgets, which are based on the price of $ 90-110 per barrel. Therefore, the current price of $ 45-50 per barrel is not comfortable for them either. The US has abruptly ceased production of shale oil. And I do not think that it looks like some kind of war. These are normal market conditions. Someone receives dividends and someone loses," Gennady Schmal concluded.