Drums of War Sound for OPEC

http://blogs.wsj.com/moneybeat/2014/08/06/drums-of-war-sound-for-opec/

By Liam Denning

 

Amid war and rumors of war, it seems odd that oil prices have dropped so far in August. That might be because another war could be brewing: within OPEC. Saudi Arabia on Wednesday released September official selling prices for its oil. It offered bigger discounts for Asian and U.S. buyers compared to August’s levels, while raising prices for Europe.

 

As energy economist Phil Verleger pointed out in a recent report, this could indicate a growing battle for market share. Rising U.S. shale oil output has caused American imports of oil from West Africa to plummet from an annualized average of two million barrels a day in late 2007 to about 300,000 barrels a day currently. That forces countries such as Nigeria to push their barrels towards other markets, such as Asia—putting them in direct competition with Saudi Arabia and other OPEC members in the Middle East.

 

By cutting Asian and U.S. prices while raising European prices, Riyadh may be sending a signal to Nigeria and others to target Europe but not price as aggressively in Asia. As OPEC’s biggest producer, Saudi Arabia can choose to accommodate competing barrels by cutting its own output—or price its own oil more competitively to defend its market share. That raises the risk of a price war in OPEC.