Oil Prices Continue To Plunge As Saudi Arabia Reveals Lower Production In September

Oil weakened again this morning to trade at 81.46 down by 63 cents as Brent oil fell by 53 cents to reach 86.32. Oil on Wednesday reversed course after the release of the official EIA inventory and tumbled only to recover on Thursday. Brent gained the most in four months and West Texas Intermediate rebounded from a two-year low after market supplies from Saudi Arabia, the world’s biggest crude exporter, were said to have dropped. Yesterday, WTI climbed $1.57, or 2 percent, to $82.09 a barrel on the New York Mercantile Exchange. Volume was 7.8 percent above the 100-day average. WTI dropped $1.97 to $80.52 after the stock report to the lowest close for a front-month contract since June 28, 2012. Brent traded at a premium of $4.74 to WTI on ICE, compared with $4.19 on Wednesday.

The big market news was the positive HSBC Chinese manufacturing PMI data followed by reports that Saudi Arabia had cut its production in September. Saudi Arabia supplied 9.36 million barrels a day in September, down 328,000 from the previous month, according to a person familiar with the country’s policy. Oil, which has collapsed into a bear market on concerns over rising production, also advanced on improved economic reports ranging from manufacturing in Germany and China to U.S. jobs.

With the U.S. on track to become the world’s largest oil producer by next year, it’s become popular in Washington and on Wall Street to call America the new Saudi Arabia. Yet the real Saudi Arabia hasn’t relinquished its role as the producer with the most influence over oil prices. Its reserves of 266 billion barrels, ability to pump as many as 12.5 million barrels a day, and, most important, its low cost of extracting crude still make it a formidable rival to the U.S., whose shale wells are hard to exploit. Saudi Arabia is the only one in the position of putting more oil on the market when they want to and cutting production when they want to. Last month, despite a global glut developing largely because of China’s slowdown and the rapid increase in U.S. production, the Saudis boosted production half a percent, to 9.6 million barrels a day, lifting OPEC’s combined production to an 11-month high of almost 31 million barrels a day. Then, the first of this month Saudi Arabia lowered prices by increasing the discount it offered its major Asian customers. The kingdom might just as easily have cut production to defend higher prices.

The big question is whether sustained lower prices will hurt the U.S. shale boom. Busting oil out of miles-deep shale using hydraulic fracturing and sideways drilling costs $50 to $100 a barrel, says the International Energy Agency, vs. pumping costs of $10 to $25 a barrel in the Mideast and North Africa. US oil supply increased by 1.2 million barrels per day in 2013, and is forecast by the EIA to increase by close to 1.5 million barrels a day in 2014. If the issue at hand were short supply, this big increase would be welcomed. But worldwide, oil consumption is forecast to increase by only 700,000 barrels per day in 2014, according to the IEA. Dumping more oil onto the world market than it needs is likely to contribute to falling prices.