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Where is the Crude Oil Price Heading?
Wed, 9 Dec Pre-Open

Recently, crude oil prices in the US tanked to a seven year low of US$ 37.65 per barrel. The oil prices tanked as 'Organization of the Petroleum Exporting Countries' (OPEC) refused to cut back on its oil production. Currently, OPEC is pumping close to 31.77 million barrels per day (bpd) which is more than its target of 30 million bpd.

The main objective of OPEC is to continue with such large amount of production in order to retain its market share. OPEC members had lost some portion of its market share to US shale producers, owing to robust production by the latter over the preceding two years.

In order to regain the market share, OPEC members started drilling oil at record high levels. The excess supply situation resulted in oil prices heading downwards. The low prices of crude oil made it infeasible for the US shale producers to drill oil as their cost of production was higher as compared to the prices of crude oil. This is evident in the latest figures wherein there is a 65% decline in the oil rig count in US. Now that US shale production has reduced considerably, will it solve the problems of OPEC and drive the crude oil prices northwards?

Given the current scenario the OPEC nations will not cut down on production. In case they do, the prices will move upwards and this may spurt the production from US shale producers. OPEC nations appear reluctant to risk a fall in their market share and hence this does not seem to be an option for them.

On the other side, if they do not curtail the production, they risk facing huge fiscal deficits on their balance sheet. Venezuela has been hit the hardest by the downturn in the oil prices. However as reported, finances of Saudi Arabia, Kuwait and Qatar are stronger at this point to withstand the lower revenues for probably a year more. Provided a similar situation appears a year later, there will be internal crisis within the OPEC to reduce the production of oil.

Currently, OPEC is in a catch-22 situation where on one side there is a well and on the other side there is a valley. Either ways, the road ahead is going to be tough.

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