America' shale oil and gas “boom” might be the closest thing the country has seen to a revolution since 1776. The controversial practice of fracking has been gaining momentum for years now, but was once associated mainly with natural gas. As the abundance of natural gas caused the price to fall, however, frackers, or “pressure-pumpers” to use the within industry term, began to focus more on shale oil. It took longer before fracking produced enough oil to have the same effect on world oil markets, but that scale has now begun to tip, and as with natural gas, the effect is going to be both substantial and long lasting.
Back in July, when conflicts were (apparently) cutting off the supply of oil from Iraq and Libya, the price of Brent crude oil was above $100, but an unsustainable spread of $7 or more emerged between Brent and West Texas Intermediate. The two prices are chained together, of course, by 1,000 economic connections, but West Texas Intermediate had stopped playing follow-the-leader. That is to say it stopped following, and started leading. West Texas Intermediate's price recently fell below $85, and Brent came tumbling after, narrowing the spread to less than $4. The rapid price drop was something the analysts didn't see coming. (Well, there was one…)
So is the change in global price leader real? Is West Texas Intermediate now the “oil of record?” If you have been waiting for a sign, it came on Monday morning when Reuters reported that the Saudis have quietly assured the world that they are not going to cut production in an effort to raise prices. This assurance was given in spite of the pleas of other OPEC nations for Saudi Arabia to cut production. Venezuela, in particular, is cash strapped and desperate for higher prices. The Saudis made it clear, however, that their decision wasn't based on a desire for lower prices. This is a slight extrapolation, but that can only mean that they believe they are no longer controlling the price of world oil.
Kuwait's oil minister, Ali al-Omair said much the same on Sunday, through the state's news agency: “I don't think today there is a chance that OPEC countries would reduce their production.” Al-Omair went on to say he thought prices would fall into the $76 to $77 range, and as he was almost certainly referring to Brent oil, that would put the per barrel price of West Texas Intermediate in the low $70s.
And we thought the 70's were gone forever.
Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.