Since the 1970s Saudi Arabia has been a leader for market adjustments. Historically, when prices would move too low, they would tighten or cut off supply. This would allow pricing to rise. In moments when prices reached levels that were too high, they would increase the supply so as to bring prices back down.
Now that they have discontinued this practice, it means that Saudi Arabia/OPEC will continue to produce at their current rates of production regardless of market price variation/volatility. So there will be no supply side adjustments, they shall no longer be swing producers.
As such, the globe has seen a significant amount of supply consistently produced keeping prices of crude low. This glut of supply may continue until prices are held too low for too long forcing other key players to lessen their production as profits decline.
At this point, the question may really be, “Who has the most money?”. The producers that can afford to continue production even if it means incurring financial loss may win this battle if they can hold on longer than the others. Producers that do not have deep pockets are forced out.
The production leaders for OPEC seemed to peak in production around July 2013 and then maintain until the first quarter of 2015. After this quarter, Iraq, Kuwait, Saudi Arabia, and the UAE together broke out of their production range with an impressive jump to higher production levels adding insult to injury to producers that do not have enough capital to stay in a low profit game.
Additionally the UAE, one of the OPEC production leaders, recently enacted an oil price deregulation, removing long standing government subsidies and allowing the global market for oil prices to now impact their pricing directly. This will cause an upward shift in local fuel pricing in the UAE, where they are taking advantage of the lower global pricing to support the deregulation process, thereby ensuring the price adjustment will have less impact.
As long as supply remains high and demand does not catch up, crude oil prices will remain relatively low. As producers run out of cash and eliminate rigs, supply will diminish and prices may come up again.
The last 3 months have seen a continued drop from around US$60 down to around US$42. This could still venture a bit lower, but I believe that after this latest failure it will hover around this territory for quite some time. Within the next 6 months it might be able to come back up to test the US$50 territory, but breaking and staying above US$50 will be a difficult task if the environment remains as it currently stands. Over the next few years if it breaks above US$50, I think that it would be very easy for crude oil prices to stay between US$50 and US$60 for quite some time, perhaps even a decade.
Lindsay Hall is a dynamic, multilingual capital markets trader, international traveler, investment strategist, financial “professor,” television host and radio broadcaster with over 2,500 hours of live TV broadcasting. Known by her clients, listeners and viewers for “giving great picks” as evidenced by more than 300 stocks/commodities/currency pairs given to the public via NewsMax.com with an estimated 70% success ratio within 24 hours of delivery during just a 3 month window.
Having spent 14 years in the realm of capital markets from stockbroker with major firms, to Forex trader/trainer, to Chief Market Strategist within the mix of commodities, Lindsay has unique insight to bring to the world of global