Oil Prices Continue Decline, Pressured by Saudi Action to Defend Market Share

Crude oil prices continued their decline on Thursday, with the American benchmark dropping below $90 a barrel during the day and its main international equivalent falling as well.

Now at their lowest levels since 2012, crude prices have been under pressure in recent months. The increase in global demand for oil this year is turning out to be slower because of weaker-than-anticipated growth in China and Europe, while oil supplies remain strong, leading to growing inventories.

But the sudden drop on Thursday was seen as a response to Saudi Arabia’s signaling on Wednesday to the markets that it was more interested in maintaining market share than in defending prices. Saudi Aramco, the national oil company, stunned markets by announcing that it was cutting prices by about $1 a barrel to Asia, the crucial growth market for the Persian Gulf producers, as well as by 40 cents a barrel to the United States.

With oil prices already under pressure, “there has been a widespread perception or hope that the Saudis would pull back on production,” said Richard Mallinson, an analyst at Energy Aspects, a research firm based in London.

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Instead, he said, the Saudis are “pricing aggressively to retain buyers,” potentially at the expense of their rivals in the Organization of the Petroleum Exporting Countries, like Iran and Iraq.

Brent crude, the main international benchmark, closed at $93.42, down 74 cents, on Thursday. West Texas Intermediate, its American counterpart, was around $88.60 a barrel in early trading, dropping below $90 for the first time since April 2013, before recovering to close at $91.01, up 28 cents.

Some analysts expect downward pressure on prices to continue. Citigroup last week cut its forecast for 2015 prices for West Texas Intermediate by $10 a barrel, to $89.50 per barrel.

Falling crude prices are bringing down gasoline prices for motorists. Prices fell to a national average of $3.33 a gallon for regular unleaded — the lowest since February — in the United States on Thursday, according to the AAA Daily Fuel Gauge Report.

“Barring any major disruptions in demand, drivers are expected to see some of the lowest prices since 2010,” the group said in a commentary.

The main source of supply growth continues to be the United States, which, as a result of the shale oil boom, now rivals Russia and Saudi Arabia in oil output.

The International Energy Agency, the energy consumers organization based in Paris, says the United States produced about 8.5 million barrels a day of crude oil in August, as well as roughly three million barrels a day in liquids from natural gas. By comparison, the agency says, Russia produced about 10.9 million barrels per day in liquids. Saudi Arabia is producing an estimated 9.8 million barrels a day of crude.

Exports of crude from the United States have risen to about 400,000 barrels a day, and analysts say that ConocoPhillips’s recent sale of a cargo of Alaskan crude to South Korea, a crucial market for gulf producers, could be a breakthrough.

“What we are seeing is pressure starting to mount on the Saudis as it hasn’t before,” said Seth Kleinman, an analyst at Citigroup in London.

While the United States remains a modest oil exporter, its surging output pushes other oil, particularly from West Africa, out of the American market, helping to lower prices. Net oil imports to the United States have fallen since 2007 by 8.7 million barrels a day, “roughly equivalent to total Saudi and Nigerian exports,” according to a recent Citigroup report.

The production surge in the United States has enabled the oil markets to shrug off potential disruptions in supply. The confrontation with Russia over Ukraine, political instability in countries like Syria and Iraq and even the Ebola outbreak in West Africa all have the potential to disrupt supply, but instead, oil prices have softened.

Another source of unexpected crude has been Libya, where production has bounced back sharply to around 800,000 barrels a day from around 240,000 barrels a day in June.

At times of falling prices, other producers look to the Saudis to throttle supply. But this time, OPEC leaders appear reluctant to do so.

What they may be doing is jockeying ahead of a scheduled meeting in November to force countries like Iraq and Iran to share in the pain of any production cutbacks.

“The Saudis are frustrated by the expectations of Iraq and Iran that it is all on the Saudis to balance the market,” Mr. Mallinson of Energy Aspects said.

New York Times