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Markets hit by oil price glut
January 5, 2015, 11:15 pm

Is Saudi Arabia's oil policy targeting both Russia's economy and the US shale energyl industry? [Archives]

Is Saudi Arabia’s oil policy targeting both Russia’s economy and the US shale energy industry? [Archives]

As oil prices continue to decline, there are concerns in both Europe and the US that major industry and production could be dragged along in what has so far appeared as a six-month free fall.

In the first major day of trade since the Christmas and new year holidays, benchmark Texas crude plummeted a whopping five per cent to $50 a barrel.

This is the lowest mark in more than five-and-a-half years.

The impact was clearly felt on Wall Street.

Major oil companies such as Exxon Mobil, Hess, British Petroleum (BP) and Chevron dropped from 2.74 to more than 5 per cent, and pulled the rest of the markets down.

By the end of trading on Monday, the Dow Jones Industrial Average, S&P500 and Nasdaq had all fallen by at least 1.57 per cent.

The Saudi Factor

Oil supply is currently more than demand – the stagnation and recession in many Eurozone countries has forced industry and governments to scale back imports.

As a result, oil prices are unlikely to rise considerably until the global outlook improves.

Major oil producers such as Texaco, ConocoPhilips, and others are also beginning to worry as they see their profits slashed. Prices at the pump in the US – already less than $2 in some states – could fall to a national average of $1.80 in the next few weeks.

Ironically, it is advances in drilling that has propelled the US to the rank of number one oil producer in the world. Some analysts believe that it is the increased tapping of ‘shale’ oil in the US that has helped drastically slash global oil prices.

But flipping through the various business and financial news networks, one can’t help but feel that the current oil market crisis – dare one say “glut” – took most analysts by surprise.

Even some OPEC members may have erred in believing that oil prices will hover around $65 a barrel until the cartel’s next summit in June 2015.

But they do agree that Saudi Arabia holds the winning card in this.

In a meeting of oil ministers late November, OPEC fell in line with Saudi Arabia’s decision not to interfere in falling prices and refrain from cutting production.

In fact, in November, Saudi Arabia helped oil prices tumble by slashing the cost of crude oil deliveries to the US, and later Europe.

OPEC’s Secretary-General Abdallah Al-Badri has repeatedly said that the cartel would not rush to bandage the price glut.

“We want to see the market, how the market behaves, because the decline of the price does not reflect a fundamental change,” he has maintained.

Theories and conspiracies

In previous years, OPEC members have been rather aggressive about maintaining oil price stability; they have relied on high global prices to balance their national budgets.

But with oil prices plunging, nearly all of the OPEC members this year will not be able to rely on their oil economy to balance their budgets; some, such as Saudi Arabia, will have to tap into their strategic foreign currency reserves to make up any deficit.

The question then this year is why OPEC has allowed this to happen.

Many people point the finger at Saudi dominance of the cartel.

As the largest oil producing and exporting country in the world the Kingdom may have a number of motives behind its decisions and policies.

There are those who believe that current Saudi policy is designed to help destroy Russia’s economy.

Moscow has been one of Saudi Arabia’s greatest energy competitors and geo-political adversaries. Russia has also been a strong backer of Syrian President Bashar Al-Assad and Iran – both of which Saudi Arabia has tried to undermine by supporting Islamist rebels in the region.

There are those who believe that Saudi is also targeting Iran’s oil-based economy as both countries vie for power and influence in the post-Iraq war era.

But perhaps the greatest theory that is gaining popularity among analysts is that Saudi Arabia fears the US growing shale oil industry and is trying to weaken it.

In essence, Saudi Arabia is investing in what it believes maintains its market share in the global oil industry.

If this is indeed the case, it may already be working.

Even before the latest oil price tumble, companies investing in shale oil production started to fear a dwindling profit margin and began to scale back investment in this energy sector.

Shale investor ConocoPhilips, for example, has already slashed its budget by more than 20 per cent.

Financing for shale operations is also likely to decrease. Analysts believe that smaller shale companies are unlikely to survive the year.

By Firas Al-Atraqchi for The BRICS Post with inputs from Agencies

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