February 1, 2013 / 2:01 PM / 5 years ago

RPT-COLUMN-Saudi Arabia must shoulder blame for high oil prices: Kemp

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By John Kemp

LONDON, Feb 1 (Reuters) - Spot Brent prices are at their highest level since October and almost $16 (16 percent) above Saudi Arabia’s theoretical target of around $100 per barrel.

“Current high oil prices are a major challenge ... for the global economic recovery,” the International Energy Agency’s chief economist Fatih Birol warned on Thursday.

Prices are within a couple of dollars of the level that last summer prompted officials in Washington, London and Paris to worry about the negative impact on their economies and make preparations to release crude and refined products from emergency stockpiles.

The global economy appears more robust than it was six or twelve months ago, though the recovery remains uneven. U.S. presidential and congressional elections are safely past. The pressure on policymakers to be seen to do something about the rising cost of gasoline and diesel is now much less.

Nonetheless, prices are rising on the expectation the global recovery will continue, causing oil demand to increase and the market to tighten further. Past experience shows prices will carry on rising until there are clear signs they are starting to push the economy into a renewed slowdown.

For the past two years, the critical price threshold has been around $115-125 per barrel -- a zone the market has now reached.

Saudi officials will blame speculators for the renewed rise. In a narrow sense they are right. But the fundamental cause is the kingdom’s decision to slash production at the end of 2012. The kingdom cut output and exports much too quickly and deeply.

By removing the threat of oversupply, the production cuts removed much of the downside price risk, and encouraged speculators to bet on further rises as the economy recovers and in the event of an upsurge in violence in the Middle East.

Whether or not the kingdom intended it, aggressive production cuts also signalled Saudi Arabia was comfortable with oil prices around $110 per barrel, and would not oversupply the market in a bid to force them down towards its oft-repeated target of $100.

Saudi Arabia has more than 3 million barrels per day of unused production capacity, according to its own estimates, and can push prices lower at any time by discounting its crude to sell more, build inventory and force the market into contango.

But speculators have concluded (correctly) the kingdom has no intention of using its spare capacity to force prices lower at present.

Isaac Newton’s first law of motion applies to oil prices (and most other commodity and asset markets):

Spot prices will continue on their current rising trajectory until there are indications the recovery is stalling, or Saudi Arabia signals it is ready to boost exports to force them lower. (Editing by Keiron Henderson)

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