|In recent weeks, the decline in crude oil has entered the target zone of the four-year symmetrical triangle top completed in October which is around $44/bbl. Any bounce back might face stiff resistance after several support levels were broken.|
- International Energy Agency (IEA) currently projects that supply will outstrip demand by more than 1 million barrels per day, or bpd, this quarter, and by nearly 1.5 million bpd in Q2 before falling in line with demand in the second half of the year, when oil demand is seasonally stronger.That said, these projections are built on the assumption that OPEC production will total 30 million bpd: its official quota. However, OPEC production was 480,000 bpd above the quota in December. At that rate, the supply-and-demand gap could reach nearly 2 million bpd in Q2.
Theoretically, this gap between supply and demand could be closed either through reduced supply or increased demand. However, at the moment economic growth is slowing across much of the world. For oil demand to grow significantly, global GDP growth will have to speed up.
On the flip side, after QE in Europe, there are talks of boosting of the economies of the EU. Also, India is coming up strongly, with the current stable government in place.
Hence, we cannot take the argument of "Supply Outstripping Demand in Future" on the face value. Moreover, any supply cut either from the US or from the OPEC, could push oil prices to rebound in the next two-three quarters.
- Now, there are two ways that global oil production can be reduced. One possibility is that OPEC will cut production to prop up oil prices. The other possibility is that supply will fall into line with demand through market forces, with lower oil prices driving reduced drilling activity in high-cost areas, leading to lower production.
OPEC is a wild card. A few individuals effectively control OPEC's production activity, particularly because Saudi Arabia has historically borne the brunt of OPEC production cuts. Right now, the OPEC bosses have opined to let market forces work. The moot point is: will Saudi Arabia cut production? In the 1980s, when a surge in oil prices drove a similar uptick in non-OPEC drilling and a decline in oil consumption, Saudi Arabia tried to prop up oil prices. The results were disastrous. Saudi Arabia cut its production from more than 10 million bpd in 1980 to less than 2.5 million bpd by 1985 and still couldn't keep prices up. But having said, this time the there are chances that other countries in OPEC could try to chip in with their own production cuts to take the burden off Saudi Arabia. However, the other members of OPEC have historically been unreliable when it comes to following production quotas. It's unlikely that they would be more successful today. The problem is that these countries face a "prisoner's dilemma" situation. Collectively, it might be in their interest to cut production. But each individual country is better off cheating on the agreement in order to sell more oil at the prevailing price, no matter what the other countries do. With no good enforcement mechanisms, these agreements regularly break down. But then any past track record cannot be future almanac. Isn't it? Therefore, we cannot totally rule out production cuts by the OPEC, if the Crude Oil continues to trend low.
- Another interesting point which needs to looked at is that during the week ending Jan. 9, U.S. oil production hit a new multi-decade high of 9.19 million bpd. Surprisingly, in the last June -- when the price of crude was more than twice as high -- U.S. oil production was less than 8.5 million bpd. Any clues, about this outlandish US stance?