Tags: Oil | Bull | Saudis | Price War

Oil Bulls Scoff at Notion of a Price War

Wednesday, 08 October 2014 07:33 PM

Ignore the talk of an OPEC price war, say crude market bulls. Oil’s next move was spelled out in Saudi Arabia’s own words.

Price cuts announced by the Saudis, including the biggest discounts for Asia since 2008, sparked speculation that the world’s biggest crude exporter would let oil tumble rather than cede market share to rivals in OPEC. This is misguided, said UBS AG and BNP Paribas SA. Brent is below the $95-to-$110 range endorsed by Saudi Oil Minister Ali Al-Naimi, ensuring the country will curb output, they said.

Brent, the European benchmark, has fallen into a bear market amid a surplus of U.S. shale oil and weaker economic growth. The discounts prompted predictions that Saudi Arabia would tolerate lower prices to deter investment in higher-cost U.S. shale. The advance of Islamist militants across a swathe of Iraq and Syria means the kingdom will shore up oil prices to support neighbors instead, BNP Paribas SA said.

“We do not buy into the argument that there’s a price war in the making,” Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas in London, said by e-mail on Monday. “Saudi Arabia has always done the heavy lifting when it comes to OPEC supply management. What is key in our view is that it is not in the best interest of OPEC to witness a prolonged period of low prices.”

Battle Commences

Front-month Brent futures slid to $91.38 a barrel Wednesday on the ICE Futures Europe exchange, the lowest since June 28, 2012, after the International Monetary Fund cut global economic growth forecasts on Oct 7. The contract settled 21 percent below its June 19 peak of $115.06. A 20 percent drop is a common definition of a bear market.

Saudi Arabia lowered the November official selling price, or OSP, last week for its Arab Light grade 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. The move followed reductions by Iran and Iraq for October, signaling the start of a potential battle for customers in Asia, according to Commerzbank AG and Citigroup Inc.

Rather than stoke competition with other nations in the Organization of Petroleum Exporting Countries, the lower prices were intended to revive profit margins for Asian refiners, a person familiar with Saudi policy said Wednesday.

Preferred Range

A range of $95 to $110 a barrel is suitable for consumers and producers, Saudi Arabia’s Al-Naimi said at OPEC’s last meeting on June 11 in Vienna. The average price of benchmark OPEC crudes dropped below $90 for the first time in more two years, the group said yesterday. OPEC will discuss prices and production at a meeting on Nov. 27 in Vienna, Al-Naimi said on Sept. 11.

History shows that Saudi OSP cuts precede decreases in production, not increases, Giovanni Staunovo, an analyst at UBS in Zurich, said by e-mail on Monday. Prices will rebound by the end of year, Staunovo said.

BNP Paribas forecasts that Brent will average $108 a barrel during the fourth quarter. Barclays Plc estimates an average of $106 during the same period, according to an e-mailed report on Oct. 3.

“I don’t think there’s any rush on the Saudis’ side to bring the market lower” when disappointing demand could do that anyway, Francisco Blanch, head of commodities research at Bank of America Corp., said by phone from New York on Tuesday. “I don’t think a price war is going on. Saudi Arabia will cut if needed.”

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Talk of an OPEC price war is misguided, say UBS AG and BNP Paribas.
Oil, Bull, Saudis, Price War
Wednesday, 08 October 2014 07:33 PM
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