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Conspiracy theories abound when it comes to the price movement in crude oil prices.
Brent crude oil price is down to $70, less than a week after the cartel of oil producing countries (OPEC) refused to cut back oil production from 30 million barrels per day, even though it had hinted at the possibility of an output cut of 300,000 barrels before its 27 November meeting. Oil analysts have cut their forecasts for the next two years, following the OPEC’s decision not to trim supplies. According to CLSA, it is becoming increasingly clear that there is a race to the bottom on price, as a lack of OPEC production cut appears to be aimed at driving prices lower, and squeezing the marginal producer out. The Asia focused brokerage has trimmed its 2015 and 2016 crude forecasts to $85 and $90 per barrel, respectively. Goldman Sachs also expects Brent Crude to end 2015 at $85/barrel.
While slack demand and increased supplies is a primary reason for declining oil prices, plenty of political theories too are swirling around at the moment. CLSA believes that the OPEC wants to squeeze out the marginal producers in North America, who have varying costs of production and the oil cartel is betting on a break-even of $60-70 per barrel. So by not cutting output, it has actively driven prices to new lows, which will make these oil producers unviable. If oil prices sustain below $70/bbl non-OPEC oil production may be forced to scale back.
Other oil experts, however, believe that there is a shift in global oil dynamics, primarily because non-OPEC producers have stepped up production. Barclays says that in the last 10 years, average crude oil prices rose four fold and OPEC's revenues last year were approximately $1.4 trillion, more than five times greater than in 2002. Demand for OPEC oil peaked in 2011 at around 31 million barrels per day and that that it will fall to 29.2million barrels/day this year and then to 28.7mn b/d in 2015, says Barclays. In the second quarter of next year, it could fall to less than 28m b/d.
The OPEC Board has chosen not cut oil production in 30 million barrels per day because it does not want to lose more marketshare believe others. The Commodities Research desk at Barclays says: “Several theories have been put forward to explain Saudi Arabia’s response in the face of falling oil prices but we think it is very unlikely that it is keeping oil output high in order to lower prices and hurt regional rivals or undermine the profitability of US tight oil producers.” Analysts believe that Saudi Arabia, a dominant OPEC producer, now has a limited ability to influence global oil prices.
