Saudi Arabia Will Support Oil Price after US Fracking Suffers – Mishka Vom Dorp

Jon Economy, Energy, Geopolitics, Government, Market Commentary

The Brent crude oil price has fallen from $115 in June to under $58 per barrel as of December 30, 2014.1
A lower oil price is where production costs make all the difference. For a long time, analysts have suggested that US production is substantially more expensive and therefore sensitive to oil prices. This is where the rubber meets the road, as the coming months may reveal the extent of fragility, waste, or mismanagement within the oil industry – in the US and globally.
What is the reason for this prolonged and unforeseen event? Who wins and who loses as it shakes out?
Mishka vom Dorp joined our team in 2010. He is a broker at Sprott Global Resource Investments Ltd.
Mishka wrote the following note to his clients giving his take on the situation, and why he believes the Organization of Petroleum Exporting Countries (OPEC) is a major player in the oil take down:
I believe the oil price would bounce back if not for OPEC’s decision to keep up oil production at the same rate. Since I believe that Saudi Arabia will eventually consent to reducing its production, I believe now could be a good time to consider investing in specific oil companies – ones with low debt and the ability to continue producing over a 3-year timeframe at these prices.
The Organization of Petroleum Exporting Countries (OPEC)
Oil is plunging due to oversupply from the US and OPEC countries, a strong dollar, and weak demand.
So why did Saudi Arabia, the de facto leader of OPEC, ignore calls last month by poorer members – including Venezuela and Iran – to cut oil production to help stop sliding prices?
Wouldn’t it be in their interest to attempt to send the price of oil back to June’s levels?
After all, at a higher price, they could produce fewer barrels and extend the reserve life of their reservoirs but still make just as much money.
We can’t know what goes on behind closed doors, but one thing is for certain: the decisions made by OPEC have a real impact on the global economy.
The oil price affects everything from food prices, to electronics, to the dream vacation you’re planning with the family.
So why isn’t OPEC cutting back on production?
Russia and Iran
Russia and Iran are both highly dependent on energy exports to fund their governments and stabilize their currencies. Both have also been a thorn in Saudi Arabia’s side due to tensions between their geopolitical interests.

This post was published at GoldSeek on 31 December 2014.