NEW YORK (TheStreet) -- An oil price cut by Saudi Arabia has triggered the sinking of the entire energy sector, but fears of a Saudi-led price war are misplaced.
West Texas Intermediate oil prices are dropping fast, as the Saudis have cut their official selling price of oil into the U.S. by 45 cents a barrel. On Tuesday morning, WTI was trading for less than $77 dollars a barrel, a price we haven't seen in more than two years. The S&P GSCI Crude Oil Index was down 2.3%, while energy stocks in the S&P 500 were down 1.7%.
The cut in oil prices here in the U.S. was contrasted by an increase in Saudi oil prices to Asia of almost a dollar a barrel, but that move into the much less crowded Asian supply chain was mostly ignored by the markets as crude in Europe also resumed its slide -- Brent Crude is trading Wednesday near $82 a barrel.
Many analysts instantly associated the U.S. crude oil price cut as another volley in the Saudi price war with other OPEC members and against the ever-increasing production of exploration and production companies (known as E&Ps) in the major U.S. shale plays. But this move by the Saudis does only one thing for sure: It overwhelmingly seeks to shore up their market share everywhere, including here, in the face of a new oil bear trend.
Saudi Arabia sets prices dependent upon demand, and with U.S. prices dropping, they had little choice but to reset their official selling price (OSP) to American customers. Moreover, they tried to counteract this effect into the markets by raising their OSP into Asia by more than twice the amount they cut into America. But when a bear market is working in crude oil, as it is now, it is the bearish news that always seems to have the greater effect.
Saudi Arabia is surely more comfortable than most producers to see prices retreat, however. The Saudi ministers are well aware that unilateral production adjustments have historically had little effect in the short-term on oil prices, as was shown in 2005 and 2010. It has also already been expressed by several Saudi sources that an OPEC-wide quota adjustment is not in their plans for the upcoming Nov. 28 meeting in Vienna.
But none of that implies the Saudis are intent on an all-out price war or even a plan to run smaller capitalized U.S. shale exploration and production companies out of business. It is, rather, a likely strategy by the Saudis to let this bear market shake out the weaker participants over time, without using their "swing barrel" production to try to force markets back into equilibrium.