To be taken with a grain of salt: conspiracy theorists have 'perfect' explanations for what's happening in the oil market
Oil war is on and on several fronts, global media is screaming.
Last week when Saudi Aramco announced cutting Official Selling Price (OSP) to American refiners, the move was seen by many not only as an attempt to shore up its customer base in a market that accounts for more than 20 percent of global crude demand, but also to rein in the galloping shale oil production in the US. Some observers viewed the Saudi price cut to US customers as an effort to undermine the boom in American production of oil from shale.
“The market reacted to it very negatively, thinking, “Here we go, we’re going to have a price war in the United States,” Anthony Lerner, a senior vice president of industrial commodities at brokerage R.J. O’Brien & Associates LLC, told The Wall Street Journal.
An otherwise very technical and commercially driven adjustment mechanism was thus misinterpreted by a number of pundits. “We see a clear lack of understanding of an OSP’s purpose,” says Morgan Stanley analyst Adam Longson. Ironically the same had happened when Aramco announced a reduction in Saudi OSPs to Asia last month. It too sparked the chatter - market share war is on.
Facts however, state otherwise!
In recent months, as US crude production jumped to the highest in three decades, shale oil has been capturing more of the domestic refining market at Saudi Arabia’s expense. The Saudi decision to increase discounts on deliveries to US refiners could also be seen in this perspective. It was basically to protect its competitiveness amid an erosion of its US market share by rival exporters such as Canada and Iraq.
In August, US crude imports from Saudi Arabia slipped below 900,000 barrels per day. With the exception of a brief period in 2009 and early 2010, Saudi exports to the United States has never been that low since 1988. US imports from Saudi Arabia in August were just 70 percent of the average level for the past ten years which has been around 1.3 million bpd.
Saudi oil, which is priced at a differential to a US sour crude marker, had in the meantime, become too expensive, compared to alternatives available to US refiners. Market dictates hence forced Saudi Aramco to react, cutting the differentials for US refiners by between 45 and 50 cents (depending on grade), while it raised differentials for refiners in Europe and Asia.
Most commentators however, interpreted the US price cuts as a signal that the Kingdom was initiating a deliberate price-war targeting US shale producers. A day after the Saudi decision, White House spokesman Josh Earnest said that the US was monitoring the global oil supply and demand situation. However, he did not comment on the possibility of Washington opting to replenish the Strategic Petroleum Reserve (SPR), as was being rumored. Phil Flynn of FOXBusiness reported that hinting at the possibility of the US increasing the SPR, was obviously a thinly veiled message to Saudi Arabia. It was an attempt by the White House to underline they were not happy with the price discounts and to remind that there were steps that the US could contemplate. And Flynn then underlines, that not only the US government could go on a buying spree to fill up the SPR, basically to shore market prices, it could also levy a tax on Saudi oil.
Later in the day, the Wall Street Journal reported that BP was going to export ultra-light crude without the permission of the US government. This move not only indicated, the bypassing of the US export ban, many also termed it as a direct challenge to OPEC and other producers. The Wall Street Journal reported that BHP Billiton cut a deal to sell about $50 million of ultralight oil from Texas to foreign buyers without formal government approval. The Journal says that this may “be only the first of many such moves as energy companies seek new markets and higher prices for the surge of crude now pumped in the US.”
If the US government remains silent and uses as a loophole the high quality of oil as not fitting the definition of crude oil it will open up the floodgates and unleash US shale oil into the world.
Would lowering crude market prices stifle US sale output growth? Not everyone seemed to agree. A recent report, “The Rapid Rise of the United States as a Global Energy Superpower,” from Citi suggests the price of oil would have to dip to the vicinity of $50 a barrel to flatten US production growth completely. And it is still considerably away from that level. “Saudi Arabia could look to allow prices to fall enough until US shale production is reined in. However, should such a circumstance arise, it looks like US shale/tight oil production growth could remain robust even in an environment of sustained lower oil prices, lower capex, and lower rig counts,” the report underlined.
And indeed pundits also fail tend to take into account that with a growing public budget, the Kingdom could not take the bait and drive oil prices - its bread and butter - down. This would be painful, none argues here too.
And when Mr. Ali Naimi, in Venezuela last week to attend a climate conference, had a meeting with Rafael Ramírez, Venezuela’s foreign minister and its OPEC representative, global media went on an overdrive, indicating a return of the 90s era.
Then too, in the backdrop of a similar drop in oil market prices, Minister Naimi had brokered a deal with the late Venezuelan president Hugo Chavez and Mexico to curb output and stabilize the markets. Venezuela then was regarded as one of the biggest OPEC quota buster. And the deal eventually helped in stabilizing markets.
But the similarities are superficial. While Venezuela has already begun pressing for output curbs, some of OPEC’s members appear hesitant. In recent weeks, Venezuela has been pushing for an emergency OPEC meeting due to the steep fall in oil prices. Riyadh however, has not been warm to the idea. Saudi officials told oil market participants in New York last month to brace for an extended period of prices as low as $80, Reuters reported.
Today Venezuela and Saudi Arabia are not on the same page on the issue and they know their limits too. They cannot alter the current scenario. It is different from the 90s. “The Venezuelans are not the reason for oversupply - and, truthfully, won’t be the solution to it either,” Mark Routt, Senior Staff Consultant with KBC Advanced Technologies told Reuters.
Conspiracy theorists seem in abundance - and - all around!