Boom and Bust: The New Future of Crude Oil

It’s a brave new world for OPEC. The international body that once held a vice grip on fuel supply and prices across the world, counting such industry heavyweights as Saudi Arabia, Russia and Iraq amongst its members has run into some unpleasant realities lately.

In the years since 2009 as US Shale production has increased apace, the market for crude oil has dropped quite precipitously. From regular highs of $100 per barrel, 2015 saw prices drop to as low as $35, while periods of stabilization have followed this past June saw oil hitting $42 again.

OPEC’s Reaction

In November of 2016, OPEC countries led by Saudi Arabia responded to the oversupply in the market by taking a unanimous decision to cut production by 1.8 million barrels. The ultimate aim was to balance the demand side of the market and return prices to equilibrium level, after a short period of recovery US shale stepped in to fill the demand gap, and prices took another drop.

In recent months, OPEC countries without the necessary reserves to manage a drop in sales, such as Libya and Nigeria have once again started to increase production, to the point that July saw a year-long high in output from OPEC countries. This has created a fracture in the once powerful, unified bloc.

The Market as it Stands

Despite the output increases triggered by certain OPEC nations and the continued growth of US shale. Saudi Arabia has stuck to its intention of reducing supply. This past week the nation affirmed that it would be cutting supply to fuel hungry Asian markets by 10%. A two-day OPEC meeting convened today has given further rise to optimism in the industry that supply reductions will be enforced.

Speculators have been encouraged by these signs of defiance, and prices have risen as well albeit slowly to $50. Investors are starting to believe that a market rebalance will be achieved, and are betting on further price rises. The last 4 weeks have seen oil investments almost triple, by a percentage not seen since July of 2016.

With oil prices trading well above 50-day moving averages of $46 for the first time since 2016, it seems that there’s momentum back in the market. Investing in oil and gas holdings right now, with a focus on exploration seems like a good play.

 

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