Can Saudi Arabia Really Lower US Gas Prices Ahead Of The Election?

One of the more curious conspiracy theories that has appeared in the past 24 hours, or since yesterday's so far unexplained crude oil flash crash without a subsequent corresponding jump (those only happen in equities it appears), is that Saudi Arabia has decided to come to the aid of the Obama administration two months ahead of the election, and to pump enough crude into the system to offset the pricing in of the inevitable liquidity tsunami from the now global QEternity, or at least until such time as the election passes. Partially confirming this speculation was the FT's report that Saudi Arabia has offered its main customers in the US, Europe and Asia extra oil supplies through the end of the year, a sign the world’s largest exporter is worried about the impact of rising prices on the global economy. Reuters adds, citing a Gulf source that "We would like to see the price coming down and we are working to bring it down... The price now, we believe is high, and it's not supported by fundamentals at all. It's just speculation and geopolitics." "The majority of OPEC countries prefer around $100, including Saudi Arabia," he said, adding that $100 per barrel was "right now the ideal price for the majority of OPEC countries ... the majority is all except one or two." "We think the oil market is well balanced," the Gulf source added. This comes a day after fellow OPEC member Iran, whose output has been substantially curtailed in recent months as a result of a global embargo (with notable exemptions for key Iran clients India and China) made it clear that it would be happy with crude rising to $150 for obvious reasons. Obviously Iran is in the "minority" according to the Gulf source. And while the reasoning for Saudi Arabia to do all in its power to promote amicable relations with America's leadership is easily explainable, it is far less clear if Saudi Arabia can actually do much if anything to really prop up crude production, prop down the price of crude and gas at the pump, and support Obama's reelection chances.

As the chart below shows, it appears that 10,000 tb/d is ceiling that Saudi Arabia can squeeze out: if that was not the case, Saudi Arabia would have moved to pump far more than its peak output of 9,800 tb/d in February-April when the price of Brent was well above current prices, and was trading in the $120-$125.

Furthermore, this is not the first time Saudi Arabia has made hollow promises in 20120 : earlier this year Saudi stated loud and clear it would step up its crude production aggressively then as well, primarily to offset the lost Iran output to Western partners. It did not: crude production never surpassed 10,000 tbd no matter the demand, supply or market liquidity picture.

Which is why we are once again convinced that any rhetoric out of Saudi Arabia is merely empty posturing set on facilitating the last two months in the election campaign, at a time when the average price of regular gas across the country is already just why of $4.00 according to the AAA, and as Zero Hedge reported last week, has never been higher on this day in history.

So much for the facts: as to what the media is distributing for public consumption, here it is via the FT:

“The current price is too high,” a senior Gulf-based oil official told the Financial Times. “We would like to see oil prices back to $100 a barrel.”

 

The price of Brent, the global oil benchmark, has risen 33 per cent from mid-June to a peak of $117.95 a barrel on Friday. On Monday it plunged almost $4 in just four minutes, but later recovered.

 

Saudi Arabia last launched a similar round of consultations with major oil refiners in March, weeks before it boosted its production to a 30-year high of 10m barrels a day. Riyadh is now evaluating the response from refiners.

 

The nation last month produced 9.9m b/d, but the senior official said that Riyadh was now again pumping around 10m b/d. “We are consulting our clients about their oil needs and telling them we are ready to supply more,” the senior official said.

 

Opec delegates said Riyadh was trying to bring prices down. “The Saudis are actively managing the market,” added another senior oil official from an African Opec nation. “They supplied a little less when prices dropped to $90 over the summer and they will supply more now that prices are above $115.”

No they won't. They can't. But just like all the central banks they can jawbone long enough until the market calls their bluff. As to why the outcome of the US election is now determined by the Federal Reserve (aka the S&P500) and potentially Saudi Arabia...

The signal from Riyadh comes as rising energy prices emerge as a contentious political issue in the US presidential race. Mitt Romney, the Republican candidate, has accused President Barack Obama of not doing enough to bring gasoline prices down.

 

The cost of regular gasoline surged in the US last week to $3.878 per gallon, the highest level ever for this period of the year. US retail gasoline prices reached an all-time high of $4.114 per gallon in early July 2008.

 

The White House last month dusted off plans to use the strategic petroleum reserve to bring prices down. But so far Mr Obama has not authorised a release, in part because opposition from allies such as Germany and, to a lesser extent, Italy, Japan and South Korea.

So what happens when the market does call Saudi's bluff in a few weeks, and no flash crash, nor even CME margin hike can do anything to keep WTI under $100, and Brent south of $120? Well, that's when the SPR Release comes into play - a move which will sent crude and gas prices lower for about a week or two, only to surge subsequently.

Which logically means an SPR release will only be attempted by the administration with about a fortnight left before the election.