Gloves off over oil: Saudi Arabia versus shale

Oil prices might have halted their earlier slide below $80 a barrel this week but analysts believe the dog fight between major oil producers over reducing the supply of oil could lead to lower prices yet.

Oil markets have seen prices fall sharply over the last four months, as faltering global growth in major economies has cut demand at a time of over-supply. On Thursday, WTI crude fell below $80 a barrel for the first time since June 2012 before recovering to 82.88 on Friday.

The global oil benchmark Brent crude climbed by almost a dollar to near $86 a barrel on Friday morning — up from a near four-year low at below $83 on Thursday — after more positive economic data from the U.S. Prices have fallen over 20 percent since June, however, when turmoil in Iraq lifted prices to $116 a barrel.

“The bearishness in the global oil market is all being driven by the U.S. shale revolution,” Seth Kleinman, head of Global Energy Strategy at Citi, told CNBC. “It’s being driven by this massive infrastructure build out that we’ve seen over the last few years and it’s taken the market a lot more time to catch up and act more rationally.”

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The U.S. shale gas industry has boomed over the last decade with shale gas and oil producers proliferating and production surging in the country, becoming a competitor for major oil-exporting countries such as Saudi Arabia.

The drop in oil prices has led to expectations that the Organization of the Petroleum Exporting Countries (OPEC) could cut output in an attempt to shore up prices, but OPEC members Saudi Arabia and Kuwait played down such a move at the start of the week. That could pile pressure on the U.S. shale industry and its producers to cut supply themselves if and when prices decline further.

“Everyone was assuming that the Saudis were going to pull back and defend prices,” Kleinman told CNBC Europe’s “Squawk Box” on Friday.

“They probably could have defended $100 but they sent the message loudly, clearly and by every venue possible of ‘we’re not going to defend prices here.’ In fact, they started slashing prices to Asia.”

Whilst markets try to divine Saudi Arabia’s reasons for refusing to cut supply, Kleinman said it was plausible that it was trying to pressure its rival oil producer Iran or was trying “to have a price war with the U.S. shale producers — because they know they can win it.”

Read more: This price would kill U.S. oil production growth

This could mean the major oil producer is entering a risky price war with the States, however, Kleinman warned. “I think they’re overestimating the level at which they’ll win it and the amount of pain they’ll suffer in the process. The Saudis have been very vocal saying that $90 (per barrel) is the floor, well, we’re sub-$90 now.”

via Gloves off over oil: Saudi Arabia versus shale.