CRUDE OIL MARKET IN PANIC STATE

Crude oil has seen some rather volatile movements in the last few sessions as the underlying dynamics
of the global oil market shift and major benchmarks enter bear markets. The recent drop in prices is part
of a vicious cycle of production and disagreement about pricing policies in the worlds largest cartel,
OPEC. Despite their vast natural resources and pricing power, it seems that several cartel members are
defecting from the groups best interests. The idea of stabilizing prices through coordinated production
levels worked for decades, but is rapidly changing with the new twenty-first century energy paradigm.
New discoveries coupled with the advent of shale and oil sands production have in the near-term
severely undermined OPECs command of the energy market.
Cartels such as OPEC are powerful because they can, if desired, swiftly impact the economics side of the
market with a weapon named supply. Increasing supplies while demand stays constant has the
propensity to reduce crude oil prices as an oversupplied market sees producers undercutting one
another on price. On the other hand, by reducing output, thereby decreasing available supply, prices will
invariably rise if demand stays constant. The cartel used to coordinate output levels amongst members,
virtually assuring power over the pricing paradigm. However, this broad level of price influence has
waned with unconventional crude oil discoveries. The United States specifically as the largest global oil
consumer has seen domestic production rise to the highest levels in decades while neighbors to the
north Canada improve their own extraction techniques in Alberta to find more price efficiencies and
decrease breakeven costs.
These changing dynamics and discoveries have led to a decline in OPECs relative power as a cartel and
has sowed growing dissension within the group. The recent slide in crude oil prices has seen member
countries attempt to sign longer-term supply deals at reduced rates to protect market share. This race
to protect market-share has seen enormous competition on pricing, especially between Saudi Arabia
and Kuwait. Aside from competing for customers on prices, countries are pumping more than quotas
which is putting severe pressures on prices in the near-term. Nations outside of OPEC are also
producing more, specifically Russia which has found itself in a situation where the country is pumping
more oil to fill tax coffers but is actually pushing down the price because it is selling more oil to a market
that is already saturated with supplies.
Price competition by other major players in the market is eroding any Russian competitive advantage as
existing Russian customers are forced to cut crude oil imports due to sanctions. This is forcing the
Kremlin into worse deals, mainly with China which has all the bargaining power as one of the sole buyers
with a willingness to conclude large multi-year deals at fire-sale prices. As the budget situation worsens,
the general response is to increase production, which invariably pressures crude oil prices downwards,
causing a spiral effect. For countries like Kuwait and Saudi Arabia, this is equally dangerous as
this has the propensity to undo the social fabric of societies that are overwhelmingly dependent on
energy exports for subsidies and social welfare. These nations have limited resources to monetize aside
from energy and their increased dependence on crude oil prices could be their undoing unless they take
coordinated action to cut production across the board in an attempt to buoy prices.
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