Oil prices fall as Saudi assurances take hold

Saudi Arabia's assurances that there is enough global oil supply are taking effect as prices for Brent crude begin to fall.

Oil prices for Brent crude fell below $123 a barrel today as dealers bought Saudi Arabia's view that global markets were brimming with supply despite the chaos in Libya.

Saudi Arabia, the world's top oil exporter, said it reined in output in February because refineries had no need for extra barrels to cover for the Libyan disruption, where output has dropped by more than a million barrels daily.

Saudi's crude oil output stood at 8.3 million barrels a day last month, down from 9.1 million barrels a day in February, Ali al-Naimi said in remarks carried by state-run Kuwait News Agency.

Prices have vaulted into triple digits this year as unrest has spread across the Arab world.

Dr Amir Alizadeh, who teaches at the Dubai campus of Cass Bussiness School of City University London, attributes crude's recent ascent to a "tsunami" of events affecting short-term supply and demand.

"Market volatility from our point of view is like London buses: the bad news can bunch up. It's what we call volatility clustering," he said.

"What has happened recently is that we've had unrest in north Africa at the same time as all this effort to bring back the [global] economy in good order has boosted demand. The bad news about supply coming on the back of increased demand creates volatility."

The two-month old uprising in Libya has cut supplies of high-quality crude to Europe from that country to nearly zero,

prompting European refiners to increase their purchases of whatever equivalent crude supplies are on the market.

That has increased demand for North Sea Brent crude, and oil from Nigeria and the Caspian region.

What has happened in Europe, says Dr Alizadeh, is that the effects of drivers for both supply and demand-driven oil shocks have compounded each other, producing a "tsunami" effect.

Supply-side price shocks tend to be related to market fundamentals, in this case an actual drop in Libyan crude exports. Demand related shocks, on the other hand tend to be driven by market speculation or fear of a future supply shortage.

"Sometimes, all the effects combine. Recently, this is the case," he said.

But periods of price volatility may be separated by interludes of calm, sometimes lasting for months or years, in which market signals cancel each other out and stabilise prices. The last such period started in October 2009. For the ensuing 12 months, crude seldom strayed from a relatively narrow band between $70 to $85 a barrel.

The message for Opec, if the organisation wants to stabilise prices, is to maintain enough spare output capacity to meet future demand, Dr Alizadeh said.

"The fact of the matter is that with low oil prices, even Opec countries don't tend to improve the infrastructure," he observed.