RIYADH´S WALL OF OIL IS HITTING THE MARKETS / THE FINANCIAL TIMES ( VERY HIGHLY RECOMMENDED READING )

Note from the editor

Riyadh’s wall of oil is hitting the markets

By Javier Blas, Commodities Editor




When Ali Naimi, Saudi Arabia’s veteran oil minister, wrote in the Financial Times in late March that the kingdom wanted “lower oil prices”, some analysts and traders doubted Riyadh’s determination.



Two months later, it is clear that Saudi meant business: production is climbing above 10m barrels a day and Saudi Aramco is offering attractive prices so refiners take the barrels – either for consumption or storage.



Crude oil stocks in OECD countries have been rising for the last 10 weeks, albeit from very low levels in Japan and the European Union. In the US, commercial crude oil stocks have surged to 382.5m barrels, the highest since August 1990. The stock build up is well above the seasonal norm, confirming that Riyadh, as Mr Naimi says, is aiming to over supply the market.



The International Energy Agency, the western countries’ oil watchdog, estimates that Riyadh pumped 10m b/d in April, the highest in 30 years. Oil traders anticipate a slightly higher production figure for May and June after Saudi Arabia slashed prices by levels exceeding expectations for crude delivered to Asia, which traditionally accounts for roughly 60 per cent of the kingdom’s oil exports.



Saudi oil takes between 20 and 45 days to reach their destination, so refiners are now feeling the impact of the extra output. The wall of oil, as described by one Singapore-based trader recently, is hitting the market. Brent crude oil prices peaked at $128 a barrel in early March and were around $125 a barrel when Mr Naimi made his intervention on March 28.



This fell to just $105 on Wednesday, a six-month low.



Favourable market conditions have also helped. The slowdown in Chinese economic growth and the growing worries about the future of Greece within the euro are also contributing to lower the cost of energy.



Moreover, the start of direct talks between Western powers and Iran about Tehran’s nuclear programme have reduced the geopolitical risk premium in oil prices.



The question on traders minds now is how much longer and further will prices fall?



Mr Naimi has been clear that Saudi Arabia favours prices of around $100 a barrel. But Riyadh is likely to let the market overshoot that mark – maybe to around $90 a barrel.



There are four reasons why: first, the global economy is weakening; second, the kingdom wants to avoid the risk of getting embroiled in the US presidential campaign with petrol costs becoming an issue; third, Riyadh wants to build a cushion of inventories to offset geopolitical risk around Iran and the increase in demand in the second half of the year, and fourth, after cashing in a windfall in the first five months of the year on the back of high prices and high production, Saudi Arabia could live with much lower prices in the second half of the year.