As a lawyer, I like saying I told you so… So I will.
OPEC, well, let’s be honest, Saudi Arabia just announced that it intends to protect market share. Therefore, the Saudis have no intention of lowering the amount of oil they produce. As CNBC noted, this was despite the protestations of other producers in the cartel price protection (production controls) were more necessary (despite the market share protection concept) for the member states. As I have mentioned before, the only way that the production from OPEC will fall is if Saudi Arabia reduces its own production. The Saudis, meanwhile, have almost zero incentive to engage in curtailing their own production.
First, the Saudi Arabia is the lowest cost producer of oil in the world. This means that its break-even costs are ridiculously small compared with even relatively efficient producers – you know, like independent American companies. Second, the Saudis were very frugal in the boom-times, only recently beginning to use debt to support public spending. This means that they can (and will) suffer through low prices for years before the kingdom begins to feel the pain. Third, the countries that are now begging for the Saudis help put the screws to the Saudi royal family (also for years) by wrecking production quotas in a mad dash to take profits from the Saudis’ pockets. Finally, most of these countries are not what we would ordinarily call “friends” of each other. Mr. Magoo could see that the Saudis have little incentive to boost prices in order to support ever more supply from Iran or Venezuela.
So, as I predicted before, the Saudis met with and listened to the arguments of the other members during the meetings in Vienna this week. After much consideration, the oil ministers then said, “Meh.” and went back to producing as much of the black stuff as they can get out of the ground.
Oil is right now getting ready to break through the $40 support (again, as I predicted earlier this week) and retest the yearly lows of around $38. If it punches through that floor too, get ready for a wild ride!