Clyde Russell, Reuters
It’s difficult to be anything other than cynical about Saudi Arabia and Russia saying they will work together in global oil markets through a newly-announced joint taskforce.
While the Sept. 5 media release boosted the price of crude oil as once again traders reacted to the latest moves in the ongoing soap opera of will they or won’t freeze output, the news was short of any real substance.
There was no commitment to the much-vaunted freeze on output, with Saudi Energy Minister Khalid al-Falih stating they are in no hurry to limit output, although it is a possibility for the future.
But let’s take matters at face value and ask the question as to what a Saudi-Russian task force is likely to discover as they monitor and report on the current and likely state of the global oil markets.
In truth, they probably don’t need a task force to tell them, as they already know, that if global oil prices do rise, it won’t be long until output from swing producers such as U.S. shale drillers starts to flow back into the market.
In fact, it’s likely that even at the current Brent price of around $47.67 a barrel, oil from the United States and Canada is competitive in China, the world’s second-biggest oil importer.
New assessments from price reporting agency Argus Media show that West Texas Intermediate (WTI) from the U.S. Gulf coast and Western Canadian heavy oil delivered to China on a cost and freight basis is already competitive.
Alejandro Barbajosa, Argus vice president for Middle East and Asia-Pacific crude, said that the end of the U.S. ban on crude exports has opened up the potential for more oil to flow eastwards from the Gulf to Asian markets.
WTI shipped from Houston to China is already cheaper on a delivered basis than some competing grades of light, sweet oil from West Africa and Southeast Asia, Barbajosa told the Argus crude forum in Singapore on Sept. 5.
Likewise, Western Canadian Select, a heavy crude grade, is similarly competitive at current prices against Middle East crudes such as Basra Heavy from Iraq and cargoes from Latin America when delivered to China, Barbajosa said.
While this doesn’t mean that Asia is about to be swamped with U.S. light and Canadian heavy oil, it does give refiners an option to diversify supply.
This is especially important if their usual suppliers, such as Saudi Arabia and the other Middle Eastern producers as well as Russia, do finally manage to limit production, or even cut back on shipments to Asian customers.
If crude that doesn’t usually flow to Asia is viable at current prices, it will only be even more competitive if the oil price does rise to somewhere closer to $60 a barrel, a level that the major oil producers would no doubt like to see.
Effectively, major oil exporters such as Saudi Arabia and Russia are caught between a rock and a hard place.
If they can engineer a price rise by limiting output, it will merely serve to bring back idled production, as well as tempting producers outside any agreement to ramp up their volumes.
This would cap any rally, and possibly send oil back to the recent lows under $30 a barrel as more crude reached global markets.
It would also put the large producers back into an unwanted market share war, whereby they have to choose between selling less oil at higher prices, or keeping market share but accepting lower revenue.
Ultimately what the Saudis, the Russians and the other big exporters want is an oil price that keeps the most marginal production out of the market, but high enough to relieve the stress on their fiscal positions.
That sweet spot is probably around $55 a barrel, but getting to that price point and staying there is not going to be an easy task.
That’s why the present machinations of meetings, statements, rumors and speculation are likely to continue for some time as the producers try to engineer a price and then keep it there.
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