Oil markets on the brink.

Author:Verleger, Philip K., Jr.
Position:Off the News - Raising petroleum prices

Oil markets teetered on the edge of a precipice as TIE went to press. The benchmark Brent crude price had declined 33 percent from an August peak of $115 per barrel to a mid-November low of $74. Further decreases seem likely. Any attempt to paper over the crisis at OPEC's November meeting, the results of which are unknown as yet, is irrelevant.

Saudi Arabia has caused the fall in oil prices. The Saudis have watched as increased production from the United States and Canada has slowly but steadily whittled down OPEC's market. Initially, they apparently thought they could ignore this effect. However, as time passed the threat became larger and more immediate.

The Saudi response has been to offer refiners a bargain they cannot refuse. The Kingdom does not set an absolute price for output. Instead, it offers customers deals tied to their markets. In the past, Saudi Arabia established price discounts no other suppliers could beat. They are doing that again today.

The declining demand for OPEC oil has led the Saudis to this action. Projections of the future "call on OPEC" (and hence on Saudi production) have been steadily cut. Three years ago, the International Energy Agency wrote that OPEC production would need to surpass 32 million barrels per day in 2015 to keep prices stable at $ 110 per barrel. The IEA prediction has been dropping ever since. Most recently, the agency warned that OPEC output would have to be less than 29.5 million barrels per day to keep prices stable at $80.

The earlier forecast of 32 million barrels per day lulled the fears of oil exporters. The large exporters were also probably reassured by forecasts of stronger global economic growth and by output disruptions in countries such as Iran, Libya, Nigeria, and Syria. They were not yet worried about increased output from the United States.

More recent events have awakened producers, particularly Kuwait, Saudi Arabia, and UAE. They have recognized the present need to defend their market share, even if that means allowing prices to fall to very low levels for a time...

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