Saudi Oil Moves: A Drop in the Bucket?

NEW YORK (TheStreet) -- Saudi Arabia is doing everything it can to cool an overheated crude oil market. But the verdict has yet to come in on whether the Saudis will be able single-handedly to drop energy and gas prices for everyone.

In response to increasing geopolitical risks from Iran and in other oil-producing regions in the Middle East, the Saudis have made some stunning moves to try to lower oil prices on the global marketplace.

First, they have ramped up their own production to an eye-opening 10 million barrels a day, more than they have pumped in more than 30 years.

They have been storing excess capacity in Rotterdam and elsewhere in Europe to make it quickly accessible to the most sensitive markets.

They have contracted a new fleet of supertankers to fill and transport more than 20 million barrels of oil to the Gulf Coast of the United States. Eleven VFCCs (very large crude carriers) were contracted in the last week by the Saudis, in comparison to 2011 when the Saudis contracted only six for the year.

The Saudis have also begun to reopen oil production areas that haven't been tapped since 1980. This return to older oil fields won't have an immediate production effect, but it underscores the desire of the Saudis to develop even more spare capacity than they already have.

This deluge of oil that's about to hit the global market is designed to have one effect: to lower crude oil prices. But it is still not clear whether it will accomplish that long-term goal.

After all the Saudis have tried this before, in 2006, but the markets were only temporarily impressed by the increased production before they resumed their march to an ultimate high price of $147 a barrel in July of 2008.

Indeed, it's tough for me to see what these 11 supertankers will do once they reach the Gulf Coast here in the U.S., because there is already a steady supply of crude to the refineries there, and we have been a net exporter of gasoline for the last several months and for the first time in our history.

Also, the Saudi moves are being viewed in a vacuum right now and not in concert with the real global oil situation.

The reason that the Saudis are moving so rapidly all of a sudden on so many fronts is precisely because of the supply disruptions that they expect -- mostly and most importantly from Iran, but also potentially from the Sudan, Yemen, Syria, Iraq and Libya.

It is in this light that most traders are digesting this news. Instead of taking it as a bearish signal for oil prices, they're viewing it as a bullish sign that the world's largest crude oil supplier is preparing for an inevitable tightness in the global oil market.

On Tuesday, global oil markets moderated only slightly on the news of this vast new supply.

Prices fell a bit more than a dollar and a half a barrel, but they are again rallying slightly on Wednesday.

There is a very strong echo of the Saudi move in 2006, where fundamental news of rising supply is not enough to temper the financial speculation and risk premium already in the oil markets -- things that are only likely to increase through the summer.

As the Saudi news plays out and tankers gets filled and shipped and begin to hit the physical markets, there are sure to be downdrafts in oil prices.

It is the nature of the oil market to take quite a few days, even weeks, to assimilate strong physical changes in supply through the financial markets. The Strategic Petroleum Reserve release in 2011 is an example of this "delayed" reaction.

But in the end, this is looking very much like 2006, where a big supply increase cannot derail a market that is trending strongly higher. Even the mighty Saudis are likely to be derailed by the massive financial influences in the global oil markets.

Readers Also Like:

>> 5 Stocks That Could Be Trampled

>> 10 Cheapest Cars of 2012

More from Opinion

7 Takeaways From Google's $550-Million Investment in Alibaba Rival JD.com

7 Takeaways From Google's $550-Million Investment in Alibaba Rival JD.com

It's Just Not Smart For Investors to Ignore the Threat of a Trade War

It's Just Not Smart For Investors to Ignore the Threat of a Trade War

To Think a Trade War's Still Just a Threat Is the Dumbest Thing on Wall Street

To Think a Trade War's Still Just a Threat Is the Dumbest Thing on Wall Street

Flashback Friday in Politics: Trade Wars, Manafort, Immigration Dominate Minds

Flashback Friday in Politics: Trade Wars, Manafort, Immigration Dominate Minds

Microsoft and Sony's Rumored Game Console Plans Bode Well for AMD

Microsoft and Sony's Rumored Game Console Plans Bode Well for AMD