Saudi loosing its position as largest oil producer - End of Peak Oil myth

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Saudi-US supply war slashes crude oil prices
By finance correspondent Phillip Lasker
Updated about 3 hours agoThu 6 Nov 2014, 4:19am

Saudi Arabia's status as the world's most powerful oil market player is being challenged.

The United States, with its huge proven reserves of shale oil, is shaking things up and changing the dynamics of the global crude market.

A conflict in Syria and Iraq would have caused havoc with oil prices in the past. Not anymore.

"We are can largely discount what we used to factor in as the geopolitical risk of the oil," said FUELtrac's Geoof Trotter.

"From my point of view, it's all about the numbers, the production and the price of oil."

That is because there is a battle of a different kind going on between Saudi Arabia and the US, which has ramped up oil production at the fastest pace in more than 30 years.

Unconventional shale oil and gas has made the US a major energy producer again, not far behind Saudi Arabia.

"The gas price has come off quite sharply since March. We've seen a big drop in gas prices," said ANZ's head of commodities research Mark Pervan.

"So it's less profitable now for the shale producers to produce shale gas, so they swing to shale oil. So, effectively, that's increasing the oil supply in the US a little quicker than we'd have thought."

A year ago, global oil supply was 89 million barrels a day and demand was around 93 million barrels.

Slower world growth has seen demand weaken slightly, while production has lifted to the same level because both Saudi Arabia and the US have ramped up output.

"You've got this battle going on at the highest possible level between oil producers," added Mr Trotter.

Saudi Arabia is trying to maintain its income and drive down prices to uneconomic levels for US producers.

"There's considerable scope for that oil price to go lower if the intension is for Saudi Arabia, for instance, to drive that price down so it's uneconomic for those companies and those countries to continue to increase their production and affect their export earnings," said Mr Trotter.

Geoff Trotter said unconventional oil reserves are more economic than people think, and Saudi Arabia would need to drive prices below $US70 a barrel.

"The other point I would make is that there's significant amount of oil in inventory around the world, either on ship or in terminal. So, you've got all the elements that would underpin a sustained lower oil price," he added.

However, ANZ does not see prices slipping much more.

"I think oil prices around these levels are about, I suppose, close to the bottom," said Mark Pervan.

"We could see a little bit more weakness if we see further deterioration, I suppose, in the sentiment."

That has happened. Oil futures suggest traders are becoming less confident of higher prices in the short-term.

Lower oil prices are putting money back into people's pockets, but there are three groups still being short-changed by the oil companies: motorists in Tasmania, the Northern Territory and diesel users.

If the oil price pessimists are right, the global production war could mean pump prices up to 10 cents a litre lower.

"We're collateral damage, but it's good damage," said Mr Trotter.

Of course, there could be one spoiler in all of this: the falling Australian dollar will erase some of the benefits, but so far, the oil price falls have been greater.