Saudi Oil-Price Cut Takes Market by Surprise

Oil prices tumbled to their lowest point in more than two years after Saudi Arabia unexpectedly cut prices for crude sold to the U.S., likely paving the way for further declines and adding to pressure on American energy producers.

The decision by the world’s largest oil exporter sent the Dow industrials DJIA, -0.14% into negative territory for the day amid concerns about the pace of global growth.

The move heightened worries over the resilience of the U.S. oil industry, which has expanded rapidly in recent years. But that growth, driven largely by new production technology used to extract oil from shale-rock formations, has never been tested by a prolonged slump in prices.

While lower crude prices generally help consumers by reducing the amount they pay for gasoline, analysts said falling energy prices will squeeze profit margins at many U.S. energy companies, particularly smaller firms or those with large debt loads.

Meanwhile, Saudi Arabia raised the prices for its oil in other locations, including Asia, where the country had cut its prices for four consecutive months.

Market watchers had expected the Saudis to either cut prices in every major region, suggesting an intention to compete for buyers, or to raise prices across the board. Asia has been an especially competitive market for exporters in recent months, so the focus on maintaining market share in the U.S. was surprising to traders, some of whom interpreted the action as taking aim at U.S. shale-oil production rather than being driven by supply and demand.

“The market reacted to it very negatively, thinking, ‘Here we go, we’re going to have a price war in the United States,’ ” said Anthony Lerner, senior vice president of industrial commodities at brokerage R.J. O’Brien & Associates LLC.

Source: MarketWatch