Saudi Action Does Not Lower Crude Prices

Saudi Oil Minister Ali al-Naimi told Reuters that there is no shortage of oil supply globally and that his nation could raise output by 12.5 million barrels a day. The leader of the largest oil producer in the world also said the nation has sent several supertankers, filled with crude, toward Texas refineries. Yet, the price of WTI crude rose almost 0.6% to $106.68 the day after the news. Brent hovered at $125. The Saudi promise has not meant much in the face of a number of other problems.

Many of these problems will not be overcome, even if the Saudis double the number of tankers they send to the U.S. and other developed nations. Several events will prevent a drop in oil prices.

U.S. refineries, particularly along the East Coast, have or will shut down because they cannot make a profit on the products they distill from crude. Other capacity is offline as well. Weather and maintenance have cut some exports from oil rich nations. And refinery maintenance is usually not a short-term project.

The main reason oil is high is the improbable chance that the Iranians could try to shut the Strait of Hormuz. Some 20% of the world’s oil exports pass through the strait. The first reaction to this threat was to send a U.S. carrier group close to the strait that would keep Iranian warships out of the area. That may work, but it also could prompt a shooting war. That might draw in Israel and could lead to a widespread, violent and long-term military action. What would happen to oil supply — and price — can only be guessed at. Some speculate that crude would move to $150 or $200 and would remain there for some time.

The Saudis have agreed to export an amount of crude that logically should calm the oil markets. An event that is very unlikely to happen has more than trumped that move.

Douglas A. McIntyre