Oil swoons 3% to new lows

NEW YORK — Oil dived more than 3 per cent on Tuesday to multiyear lows, as Saudi Arabia's sharp cut in export prices to the United States looked likely to deepen a global supply glut that has already driven prices down 30 per cent since June.

On Monday, Saudi Arabia surprised the market by raising prices for Asia and Europe but cutting prices for US customers. Oil slid as much as $2 a barrel in late trade, and the sell-off continued Tuesday, triggering technical sell-stops.

"The Saudis have basically declared war on the US oil producers," said Phil Flynn at Price Futures Group. "I think they believe that the only way they're going to survive in the long term is to break the market in the short term."

US crude futures were down $2.33 at $76.45 after reaching the lowest price since October 2011.

Many analysts say the US shale boom could slow if crude stays below $80 a barrel.

The price of Brent for next-month delivery was down $2.22 at $82.56 by 1701 GMT after touching its lowest point since October 2010.

On Monday, longer-dated oil futures became more expensive than near-term contracts, putting charts into a contango structure for the first time since January 17. On Tuesday, the December/January spread was around minus 8.

US commercial crude stocks are likely to have risen last week in the fifth straight weekly stock build, according to a survey by Reuters.  

No OPEC consensus 

The Organisation of the Petroleum Exporting Countries (OPEC) could curb output when it meets November 27, but there are no clear signs that OPEC will curb production. Most core Gulf members have indicated little alarm over the price drop.

The United Arab Emirates oil minister said the country is "not panicking". Venezuela and Ecuador have said they are working on a joint proposal to defend oil prices.

"I can see OPEC and Saudi Arabia playing the long game. A low price for a period of time may actually play into the hands of people with a lot of reserves in the ground at cheap cost," Pierre Lorinet, chief financial officer of Trafigura, indicated at the Reuters Global Commodities Summit.

Ian Taylor, chief executive of Vitol, said at the Reuters summit that OPEC members would have "serious discussions" about an output cut.

"My feeling is we're underestimating now the possibility of OPEC cutting," he added.

Saudi Oil Minister Ali Al Naimi has not commented publicly on the oil market since September. On Wednesday, he will meet Venezuela's foreign minister Rafael Ramirez, also the head of its OPEC delegation, according to a person close to the Saudi delegation. 

If anything, Naimi may simply seek to explain Saudi Arabia's latest stance on the market, a tough message about how all big producers must be prepared to endure a period of lower prices in order to slow the march of their newest rival: The United States.

"I suspect that Naimi will tell the Venezuelans the unvarnished truth — prices have to go down quite a bit and stay down," says Philip K. Verleger, president of consultancy PKVerleger LLC and a one-time adviser to President Jimmy Carter.

Even if Naimi were rallying support for action, Latin American producers struggling to maintain output would likely be his last stop.

"This [trip] is very much a sign of business as usual without any panic," said Paul Horsnell, global head of commodities research at Standard Chartered Bank.

The visits may be an early indication that the three Latin American countries — once fierce competitors selling heavy crude into the premium US market — are finding common cause facing the fast-emerging threat of North American shale and oil sands.

"There are some interesting changes and opportunities today given the fact that the United States has become a major light sweet producer," said Amy Myers Jaffe, executive director of energy and sustainability at the University of California, Davis.

Climate and natural gas

The stated purpose of Naimi's trips is benign: He will attend a climate change conference in Venezuela and a natural gas conference in Mexico. Naimi has long been the kingdom's envoy to global climate talks, but he has not been to Venezuela since 2006.

But the visits will also afford a chance for Naimi — who was involved in the late 1990s talks — to explain the kingdom's relaxed stance on oil prices to Venezuela, one of the OPEC members at greatest risk from falling crude revenues. It may be a precursor to more difficult conversations down the road.

Less than four weeks before OPEC ministers meet in Vienna, there is no indication that the group's core Gulf members are in any hurry to tighten the taps. 

Without a reduction in OPEC output or a sharp slowdown in US shale production, some analysts expect prices to keep sliding into next year.

Officials in Venezuela and Mexico declined to say whether any direct discussions between oil officials were planned. 

Tough talk or friendly chat? 

Venezuelan officials have publicly lamented talk of a price war following Saudi Arabia's move last month to cut export prices of its crude, seen by some as an indication that the world's biggest exporter had shifted strategy towards defending its market share, even at the expense of lower global prices.

But that veiled criticism is a far cry from the open hostility between the two nations in the late 1990s, when Saudi Arabia sought to punish Venezuela for revving up output in excess of its OPEC quota by flooding the market — the last of several price wars within the group. Now Venezuela is fighting to keep output from falling.

"Right now if you wanted to get production cuts the last place you would go is Caracas or Mexico City," said Nathaniel Kern, president of Foreign Reports in Washington.

Mexico, not an OPEC member, was enlisted as an "honest broker" to get the two countries talking, said Horsnell. Oil prices had tumbled 40 per cent after the Asian financial crisis of 1997.

In the end, Algeria's oil minister acted as a go-between during months of cloak-and-dagger petro-diplomacy, involving unmarked jets, secret trips to Europe and, finally, a March 1998 output deal in a rented room at the Madrid airport.

Naimi's trip shows that talk of a current price war is overblown, says Horsnell.