Why The Oil Price is Destined to Collapse By London based trader, James Sanders
Opec, the oil exporters cartel has never been very good at sticking to deals which are designed to rein in output. They recently agreed to cut production to mop up a glut and boost prices, but it turns out they are not doing a very impressive job this time around either.
According to the International Energy Agency, some producers are showing signs of ‘weakening their resolve’. In July, the compliance rate amongst Opec members was just over 75%, overall production actually rose however. You should expect the cheating to continue , and don’t be surprised if some withdraw from the deal altogether.
Opec states have become more dependent on oil revenue this decade. As The Wall street Journal pointed out recently. They have used a $100 oil price to boost spending in order to ‘pacify restive populations during the Arab Spring’ in 2011, and now they don’t dare to cut state spending too harshly. Of course, they are tempted to cheat and go for ‘jam today’, over ‘jam tomorrow’, but the situation is not sustainable in the long term.
They need the oil price to be higher to balance their budgets, and this shift has coincided with the advent of US shale oil, which has become increasingly cost efficient on the exploration front. Opec’s market share has declined to 40% from 55% in the 1970’s. US shale is coping with lower and lower prices, producing more oil and thus capping any oil price rallies, just as Opec has begun to need the highest oil price of anyone in the market. The US government estimates that American production will hit an all-time high in 2018. No wonder the oil price is doomed. Any price rises are likely to be short lived and I would recommend short selling into any strength for active traders. By James Sanders www.james-sanders.co.uk