OPEC on Friday decided not to decrease oil production as Saudi Arabia continued with a policy to squeeze less efficient non-OPEC producers out of the market.
Iran is now planning to ramp up its own production by one million barrels per day. This follows the success of the negotiations to limit and place controls over this country’s nuclear programme.
With OPEC members who have the spare capacity now free to increase supply without restrictions, it was not really a surprise to see the price of both Brent and WTI drop on Friday and Monday.
Light Sweet Crude is this morning trading well under US$ 40.00 per barrel at US$37.70. Furthermore, there seems to be nothing to stop WTI from testing and breaching the lows of February 2009 at US$33.55 area.
The downward pressure that is pushing WTI lower is a direct consequence of the policy OPEC has adopted. The deliberate decision to create an uncertain climate has a negative effect on United States shale producers who due to their higher cost of production do not know when to increase jobs or ramp up production.
The dramatic drop in the price of crude, of course, has its plus side for consumers, be it industry, electricity utility companies and those of us who fill up our cars at the petrol pump benefiting from lower prices.
However, this windfall for the consumers is going to end at some time. Oil will not stay at these levels forever with the future downside limited.
At some point, the Saudis will have to tackle the monetary imbalances the lower oil revenues is creating. Saudi Arabia has a large public sector and funds a large social programme, therefore, the inability to pay for budget commitments will at soon place a lower limit on the price of WTI. Will this be US$35.00, US$30.00 or US$25.00? Time will tell.
However, the downside is limited and it would be surprising to see further drops that exceed US$18.00.
In terms of timing, we should see a stabilization of the price of WTI by Q3 of 2016 as the price of oil bottoms around the US$30.00 mark.