Oil Slump Continues as Saudi Arabia Targets U.S.

Oil accelerated a months-long slump after Saudi Arabia cut its prices for U.S. buyers in an effort to counter the shale boom.

The move coincided with an increase in prices for Asia and Europe, signaling Saudi Arabia’s intention to grab a bigger share of the American oil market. It also suggests Saudi Arabia may be looking to squeeze U.S. oil producers, who are already under mounting pressure from falling oil prices.

Foreign producers like Saudi Arabia, the world’s largest exporter of crude, have lost some influence in the U.S., where a surge in shale oil output is reducing the need for imports.

“I think it’s a moral equivalent of war on the U.S. oil producer. That’s exactly what it is, and Saudi Arabia is not trying to hide it,” Phil Flynn, a senior energy analyst at Price Futures Group, said on “Opening Bell with Maria Bartiromo.”

West Texas Intermediate crude oil futures on Tuesday reached a low of $75.84 before settling 2% lower at $77.19, the lowest closing price since October 2011.

Brent crude, the international benchmark, slipped 2.4% to $82.78.

Since June, oil futures have retreated nearly 30% on worries over global demand and an abundance of supplies. The Paris-based International Energy Agency recently slashed its full-year forecast for consumption by 22%, while oil production in the U.S. and elsewhere continues to press forward.

“Volatility has largely fallen away the last few years, but now it’s back,” said Jamie Webster, senior director of global oil markets at IHS. While producers want stronger prices and consumers want oil to fall, “all agree they want a stable price.”

Shale’s Impact

America has been the focal point of swelling oil supplies, thanks to shale production in the Bakken, Permian and other formations. Due to Bakken oil output, North Dakota is now the No. 2 oil producing state behind Texas.

Webster said U.S. shale is the “fundamental imbalance in the system” that triggered oil’s pullback. The Organization of the Petroleum Exporting Countries (OPEC) had long targeted $100 oil, providing an incentive for companies to develop shale plays and lift production.

OPEC is now trying to figure out how it should adapt to the influx of shale oil, Webster explained.

Traders will be eyeing OPEC’s meeting later this month to see if the cartel moves to cut production or implement other measures. Webster expects there may be some bearishness after the meeting, although seasonal demand through the end of the year could provide enough support to keep Brent crude from falling much further.

At the other end of the spectrum, it will be difficult for Brent to climb back above $100 a barrel without a market-moving event, such as Libya going offline. A brief jump in oil prices over the summer dissipated when Libyan rebels agreed to reopen ports that ship oil.

Is Cheaper Oil a Net Positive?

A prolonged slump for oil prices could have a detrimental impact on U.S. producers. The top two American energy companies, Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX), reported a drop in third-quarter production amid lower realized prices.

Exxon sold U.S. oil for $89.60 a barrel in the latest period, a 12% decline compared to the year-ago quarter. Chevron’s average price for crude and natural gas liquids was down 10% at $87 a barrel.

Both firms managed to book a higher profit, however, primarily due to strength in their refining businesses.

On the consumer side, weakness in the oil market is providing a relief for drivers. Retail gasoline prices have dropped below $3 per gallon for the first time since December 2010, according to AAA. The current national average is $2.97 per gallon, down 33 cents over the last month.

AAA believes gas prices could shed another five to 15 cents in the coming weeks.

Charles Schwab Chief Investment Strategist Liz Ann Sonders said the benefits of cheaper oil for consumers and businesses outside the energy industry will likely outweigh the negative impact on producers, equipment providers and states.

In a research note published Monday, Sonders noted how 68% of U.S. gross domestic product is driven by consumer spending, and lower energy prices act as a tax cut for consumers.

Webster agreed, saying oil’s nosedive is a net positive for the economy despite the pain for U.S. producers.

“Lower gas prices hit a large swath of people out there,” he said.