Another bearish signal for the oil market is coming from Saudi Arabia. The Middle Eastern nation has reduced its output by almost 1 million barrels per day (bpd) since a high point in June of 10.1 million bpd.
Saudi Arabia is nervous of an emerging glut, fed by rising production in North America, the rapid recovery of oil supplies from Libya and the emerging oil colossus in neighbouring Iraq. This is a pre-emptive strike against bearish market sentiment – the news that daily output had been reined in to 9.025 bpd from 9.45 million bpd in November helped to lift the Brent crude price above $113 on Thursday but this morning it subsided again to $111.
The puzzle of the moment is the fragmentation of oil markets. Crude oil is acquiring characteristics of the natural gas markets, namely regional rather than global pricing. We not only have a European gas price three times the U.S. level but a European crude oil price that seems ignorant of the fracking-driven glut that is projected to materialize in the U.S. The massive price discount, some $30 per barrel, suffered by Canadian oil producers will probably continue until diverging political and commercial interests coalesce in agreement to bring U.S. and Canadian crude into the Atlantic Basin.
We have gone back to the future – back to a world that Standard Oil would have recognised, one in which the most powerful player is not the one who finds the oil, but the one who controls access to the market. America's shale revolution has finally buried the peak-oil alarmists, only to reawaken fears of those bogeymen who controlled the railroads, the pipelines, the permits and the distribution.
This is a world that Saudi Arabia understands well and is happy to live in. Until the North American export pipelines are built, the world's biggest oil exporter will ruthlessly exploit market disruptions and disjunctures. The Kingdom's biggest customers are not North Americans, but Asians who have no choice but to buy Middle Eastern crude priced in relation to expensive Brent rather than the cheaper U.S. brew.
Yet it would be wrong for North Americans to feel smug at the plight of China and India, strangled by OPEC oil pricing. Volatile energy markets will only serve to increase global political tension. It may also encourage China, in need of energy security, to adopt a more aggressive and imperial foreign policy in its quest for foreign oil.
Carl Mortished