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Price war looms in oil market

oil barrels|TAP Special| The oil market scene is turning murky, with indications of a price war developing among major producers to defend their market shares.

Crude futures tumbled to a 17-month low on signs that global supply is outstripping demand and by all indications, crude oil is poised to extend the biggest slump in more than two years. To make things worse, Saudi Arabia is said to be ready for a price war with other OPEC members.

“Oil isn’t looking like a good bet any more,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said. “Production continues to rise, flooding the market, while on a good day the demand picture looks anemic.”

“OPEC appears to be gearing up for a price war,” Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt, said in a report. “We therefore do not expect prices to stabilize until this impression disappears and OPEC returns to coordinated production cuts.”

Saudi Aramco, the state-run oil producer of the world’s biggest exporter, cut prices on Oct. 1 for all its exports, reducing those for Asia to the lowest level since 2008. The move suggests that the biggest member of the Organization of Petroleum Exporting Countries is prepared to let prices fall rather than cede market share by paring output to clear a supply surplus, according to Commerzbank.

“There is no indication whatsoever that the Saudis are going to put a floor into this market,” Seth Kleinman, head of European energy research at Citigroup in London, said by e-mail. “Saudi market share in Asia is really under assault. It is a price war. The Saudis will win, but it won’t be painless.”

Saudi Arabia has acted in the past to stop a plunge in prices. It made the biggest contribution to OPEC’s production cuts of almost 5 million barrels a day in 2008 and 2009 as demand contracted amid the financial crisis. The kingdom would need to reduce output about 500,000 barrels a day to eliminate the supply glut now stemming from the highest U.S. output in three decades, Citigroup and Barclays estimate.

Analysts say Saudi Arabia’s strategy may weaken prices in the short-term. Commerzbank projects Brent will average $105 a barrel in 2015, Citigroup predicts $97.50. Brent for November settlement traded for $93.54 on the London-based ICE Futures Europe exchange as of 10:07 a.m. local time.

Aramco reduced official selling prices, or OSPs, for all grades of crudes to all regions for November. It lowered the OSP for Arab Light to Asia by $1 a barrel to a discount of $1.05 to the average of Oman and Dubai crude, the lowest level since December 2008. OSPs are regional adjustments Aramco makes to price formulas to compete against oil from other countries.