Falling oil prices to test Saudi policy
London, April 13, 2013
By John Kemp
Saudi officials should welcome the recent decline in oil prices, which takes benchmark Brent close to the level of $100 per barrel that everyone from the kingdom's oil minister down has said is "reasonable" for both consumers and producers.
For more than a year, Saudi officials have sought to anchor market expectations by reiterating the $100 figure, though the kingdom has often appeared more comfortable with prices around $110, and adjusted production and exports accordingly.
But if the kingdom intends to stabilise prices around $100, it will need to demonstrate that it as comfortable with prices a little below this figure as it with prices a little above it. For the target to be credible it needs to be symmetrical.
Brent crude oil fell to a nine-month low near $101 a barrel on Friday as a broad investor sell-off in commodities triggered a fall as much as $3 a barrel.
The rapid slide in Brent prices from almost $119 to $101 in the space of two months is bound to concern policymakers in Riyadh and other Opec capitals.
But if Saudi Arabia and its closest Gulf allies want to give the target substance, the kingdom may need to allow prices to drop to $95 or even $90 before cutting production and trying to jawbone the market higher.
It would mark a change from the approach last summer, when Saudi and other Gulf officials appeared uncomfortable with prices below $100, and appeared to start to try to push the market higher.
Saudi officials say the kingdom cut production in response to reduced demand for its crude.
Brent prices have closed below $100 on just 24 trading days out of 330 since the start of 2012. In contrast they have closed between $100 and $110 on 93 days, between $110 and $120 on 174 days, and over $120 on 39 days.
Nonetheless, in July and August 2012, Saudi Arabia promptly moved to curb production, apparently in response to the brief period of trading below $100 in June. This early and aggressive reaction cast doubt on whether the target is really $100, or nearer $110.
The market seems set to test their resolve again, as analysts and speculators watch if Saudi Arabia tries to keep prices above $100, or will let them slide under that threshold for a time to lower market expectations and centre them on $100. - Reuters
* John Kemp is a Reuters market analyst. The views expressed are his own
