COLUMN-Oil market playing chicken with Saudi Arabia: Campbell

Fri Jul 27, 2012 10:43am EDT

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(Robert Campbell is a Reuters market analyst. The views expressed are his own.)

By Robert Campbell

NEW YORK, July 27 (Reuters) - Crude oil has shown great resilience in the face of unsupportive data over the last month, bolstered by traders' optimism that central banks will prime the economic pump yet again by printing more money.

Even traders who acknowledge that sentiment may have lifted crude temporarily out of alignment with fundamentals say they have to keep buying. Momentum can be friendly, after all.

The trick, of course, is knowing when to stop chasing the crowd, because when sentiment shifts, the reckoning can be brutal.

That shift may well come if crude prices keep rising, which will bring the showdown between the market and Saudi Arabia to a head.

Already, the market and the OPEC heavyweight are on a collision course. The path oil takes over the next few months is likely to depend on which side blinks first.

Only a few months ago, Saudi Arabia publicly stated its intent to push down oil prices. At first this was blithely ignored by the market.

At the time it certainly seemed like another tired repetition of official Saudi oil policy: The market will always be well supplied.

Yet what it marked was a clear shift in Saudi policy toward actively pushing oil into the market in an effort to inflate inventory levels in consumer nations.

Since then, Saudi Oil Minister Ali al-Naimi has gone on the record saying $100 a barrel was a "great" price for oil.

His comments after the June meeting of OPEC ministers were even more telling. Explicitly describing lower oil prices as "stimulus" for the world economy, Naimi underscored Riyadh's new, more activist, approach to the market.

TIGHT SPOT FOR SAUDIS

The impact of those words on the oil market has faded.

In many ways the showdown between the oil market and Saudi Arabia is one between sentiment and market fundamentals.

Market sentiment is undeniably bullish, supported by expectations of central bank action. Fundamentals are far less supportive, but for now are being dismissed.

On the fundamental side, attention is focused on tighter Western sanctions on Iran and the degree to which these cut into Tehran's oil exports.

Yet Saudi Arabia has maintained crude oil production above 10 million barrels per day, defying expectations that the kingdom might scale back output gradually to bring global oil supplies down to match demand.

And, at least for now, the effect of the current sanctions regime might be at its peak.

Iranian oil exports in July are expected to be flat with June, arresting a slide, helped by record Chinese buying.

South Korea has also signaled it may soon resume purchases from Iran as Tehran works to provide shipping insurance that bypasses Western financial markets.

For now, Saudi Arabia is unlikely to be too worried. Crude prices have risen smartly from their June lows, but are still close to the $100 mark the kingdom wants.

The case can also be made that plenty of short-term noise - North Sea production troubles distorting Brent prices, for instance - makes it premature to act.

Indeed, there is good reason to suspect that Saudi Arabia is hoping the market will capitulate before it is forced into action to put a lid on prices.

After all, it is hardly in Riyadh's interest to flood the world with enough crude to trigger a price crash. Digging out of that hole would be costly and potentially risky with unrest bubbling away in the Middle East.

Even in the absence of a crash it is not a cost-free policy to build stocks when no one else wants to.

At the very least, storage costs money, both in terms of operations and the opportunity cost of lost sales. When oil prices are higher in the future than they are today, storing oil for delivery later in the year can be a money maker.

But today the opposite situation prevails. Those storing oil risk losing money. Yet that is precisely what Saudi Arabia has done, filling up storage in Europe and Asia.

Pricing crude cheaply enough to get third parties to store oil also comes at the cost of money left on the table.

So the Saudi strategy right now may well be waiting and hoping other factors overwhelm the momentum of the market.

But if these factors fail to materialize, or if crude simply continues to barrel past negative news, Saudi Arabia will face the challenge faced by any central banker who wants to turn a market tide.

Intervention must be sufficiently massive to have a decisive effect on prices; otherwise, the market trend will be unbroken and the effect of any future intervention threat will be diminished. (Editing by John Wallace)

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