There have been all sorts of conspiracy theories about this event, one of the most popular
being that President Obama or even the US initiated the fall in the prices. My immediate reaction was one of surprise. "Really?" I thought...If Obama or the US initiated the collapse
in the price of crude, why did they need to place sanctions on Russia? They could have just sat back and smiled. Why would anybody attempt to damage the US oil and shale industry which has been a key to kick-starting the US economic revival? Finally, the sixty four thousand dollar question. How was this done? The answer is simple. It cannot be done in a free market democracy (unless of course one believes that Hollywood is reality). That then begs the question of what exactly is the tale behind the drama?
Lets look at the facts. In 2008 US oil production was 5 million barrels a day. Today the production is 9 million barrels a day thanks to a boom in shale oil that contributes about 3 million barrels a day. At the same time strong growth in emerging markets like China and India resulted in major energy producers like Russia and Saudi Arabia increasing and diverting their production to these emerging economies. Together with alternative energies, increased oil and gas production and a slowdown in emerging markets a rare "perfect wave" turned into a tsunami of supply. Amazingly, both Russia and Saudi Arabia increased production and continued to sell oil into this tsunami. Why?
Its all about market share and a chess game where the Saudi Kingdom avoids a check mate and turns the match to its advantage. Russia, another player, has foreign currency reserves of about $400 billion. The Saudis have double that amount. With these cash reserves they can easily outlast their competitors and creates an opportunity to consolidate their market share. OPEC clearly has collapsed and its every man for himself. Iran, the Saudi rival needs oil revenue to survive. At these prices, they are caught between a rock and a hard place. The US Shale industry requires at least $65-70 a barrel to be cost effective and they are bleeding profits. The alternative energy field is almost bankrupt, unable to compete. So today the game is all about protecting market share.
Bloomberg: "The collapse of oil prices by more than half since June has forced major producers and drillers to cut more than $40 billion in spending and fire 50,000 workers. The number of oil-drilling rigs working onshore has declined by a third since October." Today the US announced record oil stocks and Saudi Arabia has upped production to more than ten million barrels a day. Initially the oil price fell to below $50 a barrel and then recovered to about $52 a barrel. Basically the oil market showed remarkable strength in the face of what could be considered really bad oversupply news. One conclusion might be that the market has discounted the bad news and it is already reflected in the price. For the strong of heart this might even be an opportunity to invest in oil as US producers cut back at a rapid pace, durable producers hold onto market share and the weaker ones disappear into the sunset. Are we witnessing the dawn of an approaching supply demand balance? Time will tell. This drama is still unfolding and a checkmate is not yet in sight.
When two opposite points of view are expressed with equal intensity, the truth does not necessarily lie exactly halfway between them. It is possible for one side to be simply wrong ― Richard Dawkins
When everybody thinks alike, everyone is likely to be wrong - Humphrey Neill
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