Oil Freeze vs. Oversupply
For anyone who follows the markets, especially the energy sector, the news of Saudi Arabia and Russia coming together at the Negotiation table to limit the supply of oil in order to stabilize should come as big news. Unfortunately, the effect was not as big as expected. It was big in the fact that it is an agreement between an OPEC country and non-OPEC country in the case of Russia. A year ago Saudi Arabia kept up the supply of oil as the supply from the States kept steadily growing. This was a small struggle that saw the price of oil go from above $70 in 2014 to below $30 in 2015 and 2016. The image above grabbed from Bloomberg (https://fisher.osu.edu/blogs/gradlife/wp-admin/post.php?post=24082&action=edit) shows that oil could still go down further.
The above story is interesting for me because while I was working for an energy company I saw trends in oil prices that followed seasonality. For example as February ends prices of oil usually start to decrease as it is the peak season for demand along with summer. With the prices tumbling downwards with no outlook for appreciation in the near future, one has to wonder if this is a short term play by Russia and Saudi Arabia. Saudi Arabia and Russia are two of the biggest exporters of oil so they have been hit the hardest with oil’s depreciation. They would not want to lose market share to U.S. producers hence their previous increased pumping of oil supply when others were supplying the oil as well.
I do wonder though if this is not a very short term fix that is not necessarily well thought out. Saudi Arabia almost certainly relies on oil for its economic growth. Russia does depend on its oil economy but not as much. Unfortunately, they both rely on oil enough to be affected when trying to change their economic make-up. All in all I thought it was interesting to see this article on Bloomberg News and to read what some of the analysts had to say about the move. It seemed that most saw this as a small insignificant act save for the fact that it was a deal between an OPEC country and non-OPEC country. For my part, back in 2014, while doing a research report on Chevron, I thought that the oil supply was going to start increasing with the development of shale gas and fracking in the U.S., causing the price of oil to move up slightly but to eventually slightly level off and decrease.
Good article for all those who love following the markets.