Oil wars: US crude drops below $50 as Saudi Arabia drops prices to protect market share

Some stock markets are spooked as oil prices continue to slide, but bringing oil price back to a cost-based price is a good thing in the long term. For too long – almost 45 years – oil producers and their governments have fleeced the consumer. Oil prices have had no relationship to cost of production but have been governed by artificially controlling its scarcity (by the OPEC cartel) and pricing it at the level of unacceptable pain for the consumer. Predatory governments have assisted by taxing oil products as far as they can even for the necessities of living (gasoline, diesel, LPG, fertilisers, pesticides…). If the present oil wars bring the price to the consumer in line with the cost of production – and there is no shortage of oil available to be produced – then it is a fundamentally sound, and long overdue, removal of one of the great, artificial distortions of the market place.

History will show the OPEC cartel to have held back development for 4 decades and to have been an evil thing.

Even if Saudi Arabia is engaged in a multi-pronged war – against shale oil, against Russia, against Iran – the root cause of the drop is that there is no longer a monopoly that the OPEC cartel enjoys. And the the way being shown by US shale oil is available to many more countries. In the short term it may well affect stock markets as these fetters are removed but in the long term this is an inexorable driver of growth – especially for the developing countries and their hard pressed consumers.

Remarkably many oil producers are now even increasing production in a time of a glut and cutting prices to win market share. They are being short-sighted. As the Opec cartel collapses, and it becomes a buyer’s market it will be oil price which governs and even then only for short term supply contracts. It will no longer be possible for the cartel oil producers to extort long-term contracts at high prices from developing countries who have no alternatives.

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2015 not 2014 — via Financial Post

 Financial PostU.S crude crashed below US$50 a barrel while benchmark Brent crude tumbled under US$53 after data showed Russian oil output at post-Soviet era highs and Iraqi oil exports at near 35-year peaks.

Meanwhile, the outright price for Canadian heavy crude fell below US$35 a barrel. ……. The drop in WTI pushed the pushed the price of Canadian heavy crude to US$34.64 per barrel, a level that could make producing crude from the oilsands unprofitable for most operators in the world’s third-largest crude reserve.

Many of the region’s operators have already slashed capital spending and slowed work on new projects in order to cope with the price crash, though production from the region has not yet been affected.

…… Top crude exporter Saudi Arabia revealed it had made deep cuts to its monthly oil prices for European buyers , the sixth time in a row since June when it had slashed prices, corresponding with the rout in crude futures markets over the period. Analysts read the latest cut as reflecting Saudi Arabia’s deepening defence of its market share for crude. The OPEC kingpin also trimmed its prices for U.S. refiners for a sixth straight month, while raising rates for Asia.

…… Some traders seem certain that U.S. crude will be trading in the US$40 region later in the week if weekly oil inventory numbers for the United States on Wednesday show another supply build. ……. 

Russia’s oil output hit a post-Soviet high last year, averaging 10.58 million barrels per day (bpd), up 0.7% thanks to small non-state producers, Energy Ministry data showed. Iraq’s oil exports were at their highest since 1980 in December, an oil ministry spokesman said, with record sales from the country’s southern terminals.

The Russian and Iraqi data overshadowed reports of drops in Libya’s oil output due to conflict. Libya’s oil output has fallen to around 380,000 bpd after the closure of the OPEC producer’s biggest oil port Es Sider, along with another oil port Ras Lanuf.

The sooner oil price drops to less than $40 per barrel, the sooner the oil price can stabilise for 12 – 18 months. Then, as the price works its way through the economies of the consumer countries, the markets could see a year or two of stable, sustainable growth.

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