There has been a lot of controversy around the price of oil lately with major disputes surrounding OPEC, America and Russia. With global demand weak due to a slowing economy in China and Europe suffering from stagnant growth, it has not helped oil prices remain strong as they have fallen by about a third since June and by $6 over the last week. Combine this with the slight increase in world production and we can see the problem that oil prices are facing.
To further add to the problem is the revolutionary boom of America’s shale oil and gas production meaning there reliance on oil is significantly dropping. Long term this could see oil market prices remaining at a lot lower level than we have been used to over the past few years. Generally OPEC works to keep the price of oil above and beyond what it should be in the market however with America expanding out into shale it has left them with much less power to control oil’s stock price. However, OPEC has also chosen to abdicate its role of power taking the stance that the market should decide the price of oil as they would just simply not be able to manage the market. Though once the market reaches a new equilibrium many people predict prices will go back higher.
OPEC has also just announced that they are not going to reduce their production of oil either. The group has opted to maintain its 30 million barrel a day production which many predicted in advance, however, this will not ease the global oil-supply glut we are facing. This will not affect the wealthy Gulf states who have already stated they are ready to ride out the wave of weak prices, however, states like Venezuela and Iran who were opting for a production cut may not be able to ride the storm if oil prices remained this low.
A lot of members within the OPEC cartel want members outside of OPEC like Russia and America to help rebalance the market. They want them to essentially reduce their output, which could help to potentially counter OPEC’s decision not to decrease their global output. However it could well be in the interest of OPEC to ride out the low prices in order to slow down the pace of development projects in America. When the price of oil dips it becomes less economical to produce shale, this could help to cap shale production in the long term. This could be vital for OPEC as they currently account for a third of global oil sales, which could significantly lower if America’s shale production expanded.
With a potential market share war around the corner I think we could see another OPEC meeting in the near future to further reassess the situation. It will all depend on how long all OPEC members are willing to hold out on the lower level oil price.
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