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Oil trade: Difficulties and opportunities

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Oil trade: Difficulties and opportunities

Unread postby Graeme » Sat 13 Jul 2013, 19:29:33

Oil trade: Difficulties and opportunities

A typical downturn cycle for demand for OPEC oil has already started this year and is expected to intensify next year.

That will bring with it not only the usual bitter quarrels between the organization’s member states on the tough issues of production discipline, but also how other producers will react to safeguard their own interest and help keep prices relatively high and stable.

The recent release of the monthly reports by both OPEC and its sister organization that groups the main consumers, the International Energy Agency (IEA) paints a clear picture of tough days ahead.

Though demand is expected to increase due to improved economic conditions after almost four years following the world financial and economic crises, supplies from non-OPEC producers are expected to grow as well, eating into the potential share of the market residual supplier, OPEC.

The July Monthly Market Report published by the organization expects that call on its crude next year will top 29.61 million barrels per day (bpd), which means a drop of 250,000 bpd, and that follows an anticipated drop of 420,000 bpd this year.

Moreover, such levels of call will put OPEC production at below its current level of 30.37 million bpd and the official ceiling of 30 million bpd.
More significantly with demand for OPEC oil in the coming fourth quarter expected to be around 30.55 million bpd and between the fourth quarter and the first quarter of next year, call on OPEC oil is expected to see a decline of 1.27 million bpd.



Still the new industry can do with a drop of 10 percent annually in reduced cost, but the question every one avoids is what is going to happen if OPEC refused to take the brunt and defend even unofficially a minimum level of a barrel price. Will the world see a return to a one digit price for the barrel of oil?

At that time, the US drops its orthodox belief in market forces and sent its vice president to convince Saudi Arabia to lead an effort to restore some stability to the market and rise up prices, which it did. On the background was the heavy losses incurred by the US oil industry.

It is time for all market players to sit and agree on ways to achieving market and price stability.


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Re: Oil trade: Difficulties and opportunities

Unread postby ROCKMAN » Sun 14 Jul 2013, 11:23:41

While it’s true OPEC may be losing some market share and perhaps some more in the future it’s good to remember why: increased production outside of OPEC due to higher oil prices. OPEC countries don’t care how oil they sell. They care about their revenue stream. As Mr. Twain might say: rumors of OPEC’s death may be a bit premature. Even rumors of minor financial pain may be overstated.

In recent times OPEC has received a tad over $1 TRILLION in oil revenue per year. Their income has doubled from $500 million just since 2005. And increased 5X since 2002. OPEC could reduce their production by ½ and still be making the same income they were just 8 years ago. And maybe more given what removing that much oil from the market place might do to prices.

If I were the ruler of Saudi Arabia I don’t think I would lose much sleep over the prospect of selling a little less oil in the near future: I would still have a huge income much larger than I ran the country with not that many years ago. Plus I would not be depleting my finite asset as quickly. And asset that should be worth more down the road.

For OPEC it has never been about bbls of oil per day but $’s per day. And I suspect hey are extremely happy with that current metric. How many reading this post have doubled their income in the last 8 years?
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Re: Oil trade: Difficulties and opportunities

Unread postby Graeme » Sun 14 Jul 2013, 19:12:48

Is KSA capable of doing this?

Still the new industry can do with a drop of 10 percent annually in reduced cost, but the question every one avoids is what is going to happen if OPEC refused to take the brunt and defend even unofficially a minimum level of a barrel price. Will the world see a return to a one digit price for the barrel of oil?
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Re: Oil trade: Difficulties and opportunities

Unread postby Plantagenet » Sun 14 Jul 2013, 19:26:57

Graeme wrote:Will the world see a return to a one digit price for the barrel of oil?



We just had a double digit INCREASE in the price of oil over the last couple of weeks !!!!

The overall trend for oil prices is definitely UP

I think fantasizing about a single digit oil price (<10 bucks/bbl) is silly unless you've got a time machine thats lets you buy your gas back in the 1990s.

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Re: Oil trade: Difficulties and opportunities

Unread postby Graeme » Sun 14 Jul 2013, 19:37:31

I was thinking that KSA still has the capability of manipulating the oil market. I didn't mention over what time frame. Besides we already have a thread about a crash in oil prices which some analysts think will occur during the next year or two. KSA (or should I say OPEC) may have some influence on this. Comments?
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Re: Oil trade: Difficulties and opportunities

Unread postby Plantagenet » Sun 14 Jul 2013, 20:48:00

Graeme wrote:..a crash in oil prices which some analysts think will occur during the next year or two. KSA (or should I say OPEC) may have some influence on this. Comments?


The only way we'll have a crash in oil prices is if we have another global economic collapse like 2008-9. Oil got down to $34 bbl in early 2009.

This seems unlikely to happen again in the immediate future unless oil shoots back up to something like $140 bbl again as it did in 2008---- otherwise the US GDP will probably continue slumphing along at 2% growth as it has for several years now, with frakking providing enough oil to keep oil prices low and the economy still functioning.
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Re: Oil trade: Difficulties and opportunities

Unread postby Graeme » Sun 14 Jul 2013, 21:23:57

Well, it looks like the answer to my question is no.

OPEC influence on market balance diminishing as US output grows: Barclays

The ability of OPEC to influence the balance of crude markets is diminishing in the face of growing US oil production, with 2013 expected to be a rare instance of a year-on-year decline in the call on the producer group to maintain balanced markets, Barclays analysts said Thursday.

"The pace of growth in US tight oil production continues to surprise to the upside in 2013, to the extent that we now see it starting to reshape some long established patterns in global balances," the Barclays analysts said in a note.

"This is leading to an enduring reduction in the oil market's need for OPEC crude for the first time in many years," they added.

As a result, Barclays said its forecasts for global demand to fall by 200,000 b/d, due mainly to large downward revisions for both Europe and China, and supplies to increase by 600,000 b/d, meant there would be a "small decline" for the call on OPEC crude.


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And here's the real reason why oil prices have risen recently.

Event Occurs in Oil Markets Which Has Never Happened

The last two weeks oil inventories fell by a record 20 million barrels, this event has never happened in 30 years of historical data. So what the heck is going on here? It is not the case that this is the best economy in the last 30 years. It sure isn`t the case that Americans are using more fuel right now compared with any other time period during the last 30 years.


I noticed that tanker rates have been rising; is the real reason they are rising is that a bunch of oil is being taken off the market and stored in ports around the world to artificially raise prices. This wouldn`t be the first time this trading trick has been utilized by big players in the industry! It is not like Saudi Arabia has reduced production in a significant manner to account for where their excess capacity that used to go to the US in now being marketed.


Ergo, oil is either being taken out of storage and stored on tankers to artificially have the appearance of tighter supply markets, and thus influence price, and will be dumped back on the market at a later date; or some other market shenanigan is taking place where this oil isn`t making its way into the refining supply chain.

It wouldn`t be the first time traders found a way to game the system in energy markets. There is a long and storied history of just such behavior from Enron to J.P. Morgan. But something just doesn`t add up right now in the oil market!


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Last edited by Graeme on Sun 14 Jul 2013, 23:17:11, edited 1 time in total.
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Re: Oil trade: Difficulties and opportunities

Unread postby Plantagenet » Sun 14 Jul 2013, 21:37:26

Graeme wrote: Barclays said its forecasts for global demand to fall by 200,000 b/d, due mainly to large downward revisions for both Europe and China


By concensus, China GDP is expected to slow, but to still achieve +6% GDP GROWTH. Growth means MORE demand for oil.

Does Barclays think the 6% GDP growth in China is too high? Does Barclays expect China to follow the EU into recession next year? :)
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Re: Oil trade: Difficulties and opportunities

Unread postby Graeme » Sun 14 Jul 2013, 21:52:57

Apparently. If there is less growth in China, then there should less demand for oil there and a drop in oil price. Right?

Oil slips on worries over China demand

U.S. crude futures slipped in early Asian trade on Monday on concerns over demand as GDP growth in the world's No.2 oil consumer China is expected to have slowed further in the second quarter.

U.S. crude had slipped 18 cents to $105.82 a barrel by 2326 GMT, while Brent fell 1 cent to $108.80. U.S. oil settled up $1.04 on Friday and Brent ended $1.08 higher.


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Re: Oil trade: Difficulties and opportunities

Unread postby ROCKMAN » Mon 15 Jul 2013, 12:23:47

” If there is less growth in China, then there should less demand for oil there and a drop in oil price. Right?” Nope. If by “less growth” you mean a slower growth: less growth means an increase in demand. But not as much an increase as a higher growth rate would develop.

I’ll also remind folks the difficulty of understanding what’s going on by focusing on futures prices. Very little oil is traded at futures prices. If fact, typically the amount of oil traded in the futures market is many, many times greater than the amount of oil that is actually produced every day. Thus very little movement in the futures markets creates huge swings in profits/loses.

Also bear in mind that the vast majority of oil “in storage” cannot be verified by anyone. You are free to believe the numbers the KSA et al put out or not.
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Re: Oil trade: Difficulties and opportunities

Unread postby Graeme » Mon 15 Jul 2013, 17:56:27

ROCKMAN wrote:Also bear in mind that the vast majority of oil “in storage” cannot be verified by anyone. You are free to believe the numbers the KSA et al put out or not.


This question of storage looks like manipulation to me. And I'm not the only one.

U.K. Regulators Consider Criminal Probe Into Oil-Price Fixing

The U.K. antitrust regulator is considering a criminal probe into oil-price manipulation as European Union officials conduct a civil investigation.

The Office of Fair Trading is liaising with U.K. agencies including the Serious Fraud Office and Financial Conduct Authority “to establish whether there is sufficient available evidence to warrant a criminal investigation, and if so who is best placed to take action,” it said in a statement today. Prosecutors at the SFO said in May that they were “urgently reviewing,” whether to start a criminal inquiry.

Antitrust officials from the European Commission raided Royal Dutch Shell Plc (RDSA), BP Plc, Statoil ASA (STL) and Platts, an energy news and price publisher, in May to investigate allegations of price manipulation and collusion by traders in crude, refined-product and biofuels markets.

The OFT’s statement was in response to a petition by campaigners today calling for an investigation by the U.K.

“What we want is a full 18-month to two-year inquiry to find out what’s going on, why motorists are being ripped off,” Robert Halfon, a U.K. lawmaker, said today in London outside the OFT offices.


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Re: Oil trade: Difficulties and opportunities

Unread postby ROCKMAN » Mon 15 Jul 2013, 19:48:46

Graeme – I haven’t paid much attention to that story. But I think the suspicion was they were manipulating the futures markets by how they were posting inventory/production numbers and not affecting the actual oil sale prices.

As far as the KSA and the rest of OPEC taking anti-competition actions that’s exactly why OPEC was created. They are free to manipulate the oil market in any way they care to. They are not subject to any country’s anti-trust laws. The KSA doesn’t need to hide oil in tankers offshore. Tomorrow they could announce cutting production 10% solely for the purpose of increasing the price of oil and no one can charge them with anything. It’s their oil and they are not obligated to anyone as to how much they produce or at what price they sell it. IOW it’s fully within their rights to manipulate their production however it benefits them even to the detriment to the buyers.

It’s not personal…just business. No different then why Ford Motors doesn't produce twice any many cars this year as they planned to: why flood the market with a product and have to discount the excess to get it to move? Every producer of every item looks for that sweet spot. Given that OPEC is generating twice as much income today as just 8 years ago we should be thankful they haven't cut production. They apparently need that extra cash flow otherwise why would they be selling that amount of oil?

If you had an inventory of widgets why would you sell more than you need to generate an acceptable profit for your company while knowing you have a very limited ability to make many more widgets in the future? And by not flooding the market with your widgets and driving their price down you'll have that many more to sell in the future when widgets are even less available at a time when the world needs even more then you have to sell today.
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Re: Oil trade: Difficulties and opportunities

Unread postby Graeme » Mon 15 Jul 2013, 20:44:55

Well, it's not only the UK regulators investigating price fixing, it's happening in the US too.

Your Price of Gasoline Is Going Up! How Sweet It Is!

Over the past weeks there has been a dramatic, near inexplicable rise in the price of crude oil with direct impact on what you are paying for gasoline. The price of oil has increased over 10 percent -- that is over $10 per barrel. Considering U.S. consumption of near 20 million BBLs oil/day, it is costing the American economy some $200,000,000/day. Great for the oil industry and our politicians who have the industry's back while your pocketbook, out of which that hefty sum will be picked, doesn't lobby and makes little noise.

Of course there is the usual palaver put forward by such august authorities as the NY Times. Just days ago, the Times trotted out for us the 'round up the usual subjects' list explaining the steep jump in oil and imminent further increase in the price of gasoline rationalizing the sharp rise of West Texas Intermediate crude oil listing "export failures in Libya," "disruptions of Nigeria's pipelines," "Cushing, Okla. Stockpiles falling 2.7 million barrels" (no mention of course that it leaves 47 million barrels remaining), unrest in Egypt (no mention that if, if, the Suez canal were to close, shipping costs for oil from the Persian Gulf to Europe would increase by less than 50 cents per barrel and not the more than $10/bbl booked over the past few weeks (please see "The Price of Oil: Speculation, Manipulation Or a Deeply Broken System" from July 8, 2013).

No mention, no hint that the game may be rigged and that the oil industry and the commodity exchanges are taking us down the garden path, with a corrupt system that has left all vestige of fair play and market forces that reflect true conditions of supply and demand. Even our government and its slumbering agencies are beginning to wake up to the fact that the game, as played is broken, if not already completely rigged.

Just days ago, barely reported in the business press (neither in the Wall Street Journal nor that paragon of oligopoly palaver, the New York Times) we were informed that the Federal Trade Commission (FTC) has opened a probe on oil price-fixing. Will it result in anything meaningful? Time will tell. Previous initiatives by other government agencies have gone nowhere while our Wall Street riddled CFTC is still studying "position limits" of exchange traded derivatives now more than three years after passage of the 2010 amendment to the Commodities Exchange Act of 1936 authorizing the CFTC to implement speculative position limits for futures and options contracts in certain energy commodities to prevent excessive speculation. That speculative/trading positions on the exchanges are some 30 times greater than physical product seems to have escaped them either through baleful ignorance or worse.

We are also being told that it is in the normal order of things that West Texas Intermediate (WTI) crude is increasing in value toward levels approaching that of Brent Crude. Really? The United States is awash in oil with inventory levels a hair from all time highs, and domestic production forever increasing, while imports of offshore oil to refiners without affiliation to offshore producers are decreasing dramatically (excepting Saudi Arabia's Motiva Refinery in Texas and Venezuela's PDVSA owned Citgo refineries).

Why the compulsion to align the price of WTI to Brent Crude? And in whose interest? Clearly that of the oil exporters, OPEC, the Russians, et al. For them the most frightening market in the world today is the U.S. market for natural gas and its price, which at $3.60 MMBtu thereby selling at less than one-third the price of natural gas in offshore markets. This differential is beginning to have an enormous impact on major international gas exporters such as Russia's Gazprom. Because of our self-reliance in natural gas, and as we do not currently have the capability of exporting gas by sea which is traded as Liquefied Natural Gas (LNG), our natural gas market is a wholly domestic market subject to American anti-trust laws and oversight, and therefore, for once, a true reflection of supply and demand. Were OPEC and its ilk operating in the U.S. market as American or American-based oil companies, they would be hauled off in handcuffs for their illegal collusionary activities. Clearly, given the experience of American natural gas prices, any disjunction in the price of WTI to Brent is a clear threat to the current pumped up price of oil on world markets, for which 'Brent' is the leading benchmark.



Trying to influence futures prices? Impossible you say and as the oil industry would have us believe. But here we have, smoking gun in hand, our own government engaged in manipulative activities, impacting prices in the market. If we can do it through our Department of Agriculture with its limited budget, why not Saudi Arabia or Russia and others, directly or indirectly, with their sovereign wealth funds holding balances ranging in the hundreds of billions of investing and trading dollars. What is clear is the lack of clarity -- the urgent need for full transparency of trading on the Commodity Exchanges, be it oil and its downstream products, gasoline, heating oil, diesel and on, to return the Exchanges to their once heralded function of establishing true market value and unfettered price determination of supply and demand. Full transparency is essential -- who is trading, on whose account? Are they simply traders, or are they producers and consumers of the commodities being traded? The days of the Commodity Exchanges functioning as casinos should be brought to a cataclysmic halt by forceful government action serving the interests of the public's well-being and sane economic policy.

How sweet that would be!


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Re: Oil trade: Difficulties and opportunities

Unread postby ROCKMAN » Mon 15 Jul 2013, 21:40:49

Graeme - I think you understand this but for others: there is nothing illegal for a US oil company to set the price it offers for its oil or refined products at any level they want for whatever reason they want...like increasing their profit margin. What's illegal is for two or more companies to agree to set their prices at a certain level. But if all the companies respond to market conditions and raise their prices independently then that's not price fixing. For instance a Shell and an ExxonMobil gas station are on opposite corners. Shell raises their price by $0.30 gallon because their source of oil just raised their prices. Or maybe Shell has sold more gasoline then expected in the region and their inventory is low so there's not as much pressure to maintain a high sales volume. But ExxonMobil didn't get hit with an increase in oil price. And their inventory is flush with gasoline. But then the XOM station still raises their price $0.28 per gallon.

No collusion...no anti-trust violation. XOM is just responding to local market conditions. They are under no legal obligation to not raise prices. But that's no different then what you and almost everyone has here done with their salaries: we price our selves based on the local market conditions: how many here have offered to work for much less than your completion was willing to work for?

Remember: that XOM station only raised their price by only $0.28...not $0.30
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Re: Oil trade: Difficulties and opportunities

Unread postby Graeme » Sun 21 Jul 2013, 21:17:40

Opec worries remain despite oil prices topping $100 a barrel

Even as crude prices recovered this week to again climb above US$100 a barrel, relieving oil producers after a sudden decline earlier this week, analysts say Opec still has reason to worry.

At next month's meeting, ministers will weigh the current output target, which has remained essentially unchanged since 2008, when producers acted swiftly to halt falling prices.
The quota has been notched up to include Iraq, but with a lack of individual quotas, Saudi Arabia pumping as it sees fit, and rebuilding nations such as Iraq and Libya pumping as much as they can, for now the target remains just that.

But ministers may want to think about curbing production to within the official 30 million barrels per day (bpd) as prices remain near or below $100 - the preface to what some say is a market correction coming in the second half of this year.


But he added: "Opec is not that much concerned about today's prices. What I think is their concern is the market fundamentals. It's not a matter of, Brent is going below $90 or below $100, that they will defend the $100 level. That is not the objective of Opec. They look longer term."


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Re: Oil trade: Difficulties and opportunities

Unread postby ROCKMAN » Mon 22 Jul 2013, 09:39:50

“At next month's meeting, ministers will weigh the current output target, which has remained essentially unchanged since 2008, when producers acted swiftly to halt falling prices.” I’ll make the point again that OPEC doesn’t care how much oil they produce but what their income level will be. From the EIA:

“Based on projections from the EIA December 2012 Short-Term Energy Outlook, EIA estimates that OPEC could earn about $1,052 billion of net oil export revenues in 2012 and about $955 billion in 2013, in nominal terms (unadjusted for inflation). In 2011, EIA estimates that OPEC earned about $1,027 billion in net oil export revenues, a 33-percent increase from 2010. Saudi Arabia earned the largest share of these earnings, $310 billion in 2011, representing approximately 30 percent of total OPEC revenues.”

These revenue numbers represent a 65% increase from 2006. Always difficult to know exactly how much oil OPEC is producing at any one time but I think Laherrere make as good a guess as anyone. In 2006 OPEC was doing 30 million bopd. Today they are doing slightly less. So OPEC is producing a tad less oil and making a lot more money thanks to higher oil prices. Oil prices could drop significantly and OPEC would still have an income greater than they has just 6 years ago. Or, conversely, OPEC could reduce their production rate by the equivalent amount added to global production rates and still maintain a high income level. In fact, OPEC could reduce production by 10+ million bopd and they would still be receiving as much income as they were just a half dozen years ago. And I don’t recall anyone citing OPEC poor financial conditions in 2006.

At this point OPEC, and especially the KSA, know they are nearing their PO moment. A number of OPEC countries have already reached that point or are getting close. If OPEC can decrease production while maintaining an adequate income and at the same time stretching out their production lives why would they sell their oil cheap if prices were to suddenly fall? IMHO they wouldn’t. In fact, I’m a bit surprised they haven’t been holding oil off the market. OTOH we have all this new oil (US shales, Canadian oil sands, DW US, Brazil, Africa oil, etc.) and we still have high oil prices. Of course, increased demand by china et al is certainly helping offset non-OPEC production increases. And since oil exports volumes are a state secret how do we know that the KSA is refusing to sell all the oil it can to willing buyers? IOW maybe the KSA has found that sweet spot between demand and price all sellers look for. And just maybe the KSA is pleased with the gains in non-OPEC production since they are able to maintain income levels while preserving more of their reserve base for future sales as well as internal consumption.

Maybe the shale/oil sands are to the KSA as a white washed fence was to Tom Sawyer. IOW: from the KSA: “Of please, don’t add more oil to the global economies so they can still grow and pay current oil prices while we’re able restrain our production preserving our depleting resource.” The most successful con is when the mark doesn’t even know he was tapped. LOL.
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Re: Oil trade: Difficulties and opportunities

Unread postby Graeme » Mon 22 Jul 2013, 16:49:09

ROCK, Very nice essay as most of your posts are. Might post more OPEC plans here if I see them. Can I go back to "price manipulation" for a moment?

It seems that at least one trader (are there others?) has got fined for such activity.

UK and US regulators fine trader £3m for manipulation of oil market

A US oil trader has been hit with $4.5m (£3m) in fines and financial penalties by British and American regulators after he admitted using a high-speed trading programme to manipulate oil and gas markets for his own profit.

Michael Coscia, founder and sole owner of New Jersey-based Panther Energy Trading, was ordered to pay a total of $2.8 in fines and disgorgement of profits by the US Commodity and Futures Trading Commission (CFTC) and banned from trading for a year, while the UK’s Financial Conduct Authority (FCA) hit him with a £597,993 fine.

In addition, the Chicago Mercantile Exchange has imposed its own fines and penalties totalling a further $2.1m and banned Mr Coscia from trading for six months.

The fines followed an investigation by the authorities that uncovered an aggressive trading strategy used by Mr Coscia to push the prices of key commodities such as Brent in his favour.


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Re: Oil trade: Difficulties and opportunities

Unread postby ROCKMAN » Tue 23 Jul 2013, 07:55:08

Graeme - Good link...thanks. As I suspected the article explains how he was manipulating the futures market and not actual oil sales. As far as what one defines as "manipulating the market" that can get a little fuzzy. A company decides to reduce the amount of oil sent thru it's next run at the refinery because they have a large unsold inventory. By putting more product on the street they have to reduce prices to get it to move. So they limit the amount of fuel the produce to allow for a higher price:is that manipulation or a standard business practice? If the KSA reduces how much oil it sells next month in order to keep prices where they are today is that manipulation or just common sense?

"Manipulation" is something of a loaded term that implies some wrong doing in the eyes of many. But all commodities on the planet are subject to such decisions. In that sense the price of everything everyone buys has been manipulated.
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Re: Oil trade: Difficulties and opportunities

Unread postby Graeme » Thu 25 Jul 2013, 18:05:33

OPEC to Reduce Exports as Demand Passes Peak, Oil Movements Says

Crude shipments from the Organization of Petroleum Exporting Countries will decline from near their highest in a year as summer demand passes its peak, tanker-tracker Oil Movements said.

The group, which supplies about 40 percent of the world’s oil, will cut exports by 410,000 barrels a day, or 1.7 percent, to 23.95 million barrels a day in the four weeks to Aug. 10, the researcher said today in an e-mailed report. The figures exclude two of OPEC’s 12 members, Angola and Ecuador.

“We’re already over the peak,” Roy Mason, the company’s founder, said today by phone from Halifax, England. “There was a late summer surge but that’s it. From here to September the direction of shipments will be down.”


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