OPEC’s Role In The Oil Crash Of 2014
OPEC just shook the global energy industry to its core. As you’ve likely heard, the Middle Eastern oil cartel decided not to cut 2015 production in their late November meeting. Production will remain at 30 million barrels a day at least through early 2015.
I have to admit, I’m shocked by their decision.
Not only did OPEC drive WTI crude to 5-year lows at $64 a barrel, but they essentially gave up their ability to set prices. Since they supply around 40% of global production, OPEC has played the role of global price setter for the past 40 plus years.
But as it looks now, market forces will take control of the global crude pricing. And since this hasn’t happened in decades, it’s tough to say how low oil prices will go before the market finds equilibrium.
Why did OPEC make such a move?
There are different theories. The most prevalent is the idea OPEC is trying to drive marginal US shale producers out of business. Global supply and demand will eventually come back into balance after the weakest US shale producers throw in the towel.
While the theory is valid, I still have a hard time believing it…
As I mentioned in a previous article, US producers have hedged enormous amounts of production. As a result, they simply aren’t going to stop drilling for oil cold turkey now that prices are low.
Truth is, it will likely take a year, and possibly more, before US production slows meaningfully.
By that time, OPEC producers like Iran, Venezuela, and Libya will be under immense economic stress. Estimates vary, but these countries need oil well over $100 to balance their heavily socialized budgets.
Don’t be surprised to see civil unrest in parts of the Middle East and Venezuela thanks to the oil crash of 2014.
But here’s where it gets interesting…
Folks, Saudi Arabia isn’t stupid.
The Saudis are the de facto leader of OPEC since they are the largest producer. I guarantee you they realize it will take a long time to bankrupt US producers and bring crude prices back up.
So why would Saudis knowingly bring economic hardship upon other OPEC members?
Here’s my conspiracy theory…
The Saudis (with prodding from the US behind the scenes) are trying to bury Russian and/or Iran.
As you’re likely aware, Russia is essentially invading Ukraine. At the same time, Iran is still in heated negotiations with Western powers over its stability threatening nuclear program.
Since Russia and Iran are heavily dependent on crude revenues, this price downturn is bringing extreme economic pain. It won’t be long before economic realities force these countries to comply with Western powers.
Bottom line…
This oil crash of 2014 has more to do with economic arm-twisting than anything else. Once the West gets what it wants, the Saudis will cut crude production and prop up prices.
Until Next Time,
Justin Bennett
BIO: Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com. With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them. Sign up for our free reports and commodity newsletter at http://commoditytradingresearch.com/free-sign-up.
Category: Commodities
