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Montevideo, November 15th 2018 - 17:30 UTC

Oil price may slump to US$ 20... or then again maybe not

Monday, December 22nd 2014 - 08:48 UTC
Full article 8 comments
The price of oil may go up or down, but neither case is likely in just a few weeks The price of oil may go up or down, but neither case is likely in just a few weeks

Market analysts describes two possible international scenarios. Whichever one prevails will be decisive. But it is not happenning soon.

Award-winning journalist and financial economist Anatole Kaletsky said in his report for Reuters that “one of two events” needs to happen to see a change in trend. “The first possibility,” explains the expert “the one most traders and analysts seem to expect, is that Saudi Arabia will re-establish OPEC’s monopoly power once it achieves the true geopolitical or economic objectives that spurred it to trigger the slump.” And although a long shot, the second scenario is that the global oil market “will move toward normal competitive conditions in which prices are set by the marginal production costs, rather than Saudi or OPEC monopoly power.”

How long will the present state of things continue? The analyst was inequivocal - “the process will take a long time to unfold,” adding that it “is inconceivable that just a few months of falling prices will be enough time for the Saudis to either break the Iranian-Russian axis or reverse the growth of shale oil production in the United States.” He also explained that it “is equally inconceivable that the oil market could quickly transition from OPEC domination to a normal competitive one.”

He warned that “the best that oil bulls can hope for is that a new, and substantially lower, trading range may be established as the multi-year battles over Middle East dominance and oil-market share play out” and that “the key question is whether the present price of around $55 will prove closer to the floor or the ceiling of this new range.”

Based on historial data, Kaletsky said that “the demarcation line between the monopolistic and competitive regimes at a little below $50 a barrel seems a reasonable estimate of where one boundary of the new long-term trading range might end up,” but it remains to be seen whether the “$50 [mark] be a floor or a ceiling for the oil price in the years ahead”

“There are several reasons to expect a new trading range as low as $20 to $50, as in the period from 1986 to 2004,” the expert said. A smaller long-term demand due to new environmentally-friendly technologies, the lifting on sanctions against Iran and Russia and the ending of wars in Iraq and Lybia would either bring down demand, prop up supply... Or both.

According to Kaletsky, the “U.S. shale revolution is perhaps the strongest argument for a return to competitive pricing instead of the OPEC-dominated monopoly regimes of 1974-85 and 2005-14,” because production can be turned on and off at will, while the Saudis and other low-cost producers would always be pumping at maximum output. “This competitive logic suggests that marginal costs of U.S. shale oil, generally estimated at $40 to $50, should in the future be a ceiling for global oil prices, not a floor.” he said.

But “there are also good arguments for OPEC-monopoly pricing of $50 to $120 to be re-established once markets test the bottom of this range” if OPEC members learn to function again as a cartel. “Although price-fixing becomes more difficult,” he went on to explain “as U.S. producers increase market share, OPEC could try to impose pricing 'discipline' if it can knock out many U.S. shale producers next year.”

Top Comments

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  • yankeeboy

    We need to start selling off the USA strategic oil stockpiles. That will slump oil for a long time and frankly we don't need it any longer.

    Dec 22nd, 2014 - 01:08 pm 0
  • frenchguy

    another similar one : http://www.bloombergview.com/articles/2014-12-21/ready-for-20-oil

    Dec 22nd, 2014 - 02:50 pm 0
  • Skip

    Prices will always rise again eventually. And when they do, all the shake and fracking will start all over again. Saudi Arabia doesn't have a monopoly unless it is willing to live with low prices and reduced income permanently.

    Indeed Saudis Arabia is doing the US a favour. Because this will lead to rationalisation in the fracking and shale industry and also prompt increased efficiencies. There's nothing like a good recession to reform and come back stronger.

    Dec 22nd, 2014 - 04:30 pm 0
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