OPEC Brings Oil Price War Home in Pursuit of Asia Cash
Comment of the Day

October 20 2015

Commentary by David Fuller

OPEC Brings Oil Price War Home in Pursuit of Asia Cash

When it comes to deciding how much to charge Asian oil buyers,OPEC members are showing little regard for tradition.

Suppliers from the Organization of Petroleum Exporting Countries have long moved in lockstep, raising or lowering prices in tandem. Now, Kuwait is undercutting Saudi Arabia by the most on record and Iraq is also selling its oil more cheaply than the group’s biggest member. Qatar is pricing cargoes at the biggest discount in 27 months to competing crude from the U.A.E.’s Abu Dhabi.

While the group that accounts for about 40 percent of global oil supplies maintains a collective strategy of flooding the market with crude, the semblance of unity has vanished when setting monthly selling prices. With Asia forecast to account for most of the growth in global oil demand this year, competition for the region’s buyers is trumping historical allegiances.

“It’s a full-on fight for market share within OPEC,” said Virendra Chauhan, a Singapore-based analyst at industry consultant Energy Aspects Ltd. “That’s even as the group tries to fend off a rise in non-OPEC production from countries such as Russia, Brazil and the U.S.”

David Fuller's view

‘All is fair in love and war.’  Members of OPEC do not share friendships – just mutual interests.  The same can be said for the EU or any other alliance of self-interest.  When times are tough it is every nation for itself.  It is not edifying but it is how the world works at the international commercial level.

How will this play out?  Every precedent in commodities that I am aware of indicates that leading suppliers of crude oil, which remains the world’s most important commodity, can achieve little more than a Pyrrhic victory.  They would do best by declaring victory and cutting production, as I have said before, and diversifying their economies.  However, that requires an acceptance of the reality that oil producers no longer control this market beyond a few short-term surprises.  The most sinister of these will be military.

Incidentally, I think forecasts of Brent crude oil (weekly 10-Yr & 5-Yr) falling to the $20 to $10 region are too pessimistic.  The weekly key reversal in late August probably marks the low at $42.23 on the 24th, when so many lows were reached, or very close to it.   

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