A very public, extended “family feud” occurred this past weekend, when Saudi Arabia called a meeting with both OPEC and non-OPEC countries, intending to freeze oil output. Had it succeeded, it would have been the first such successful venture since 2001.
However, the plan failed even before it could get started, as Iran refused to discuss curbing its rising volume and did not even show up to the meeting. Saudi Arabia had made it clear that it would not cut production if Iran did not agree to do the same.
Predictably, oil prices declined by $7 to $37 a barrel, but mostly recovered a day later. The drop might have been worse, but Kuwait is in the midst of an oil strike that has taken some supply off the market.
In the big picture, however, this feud leaves the oil markets in a bit of a tough spot. It demonstrated to the whole world that suppliers cannot reach agreement on production limits. And, at least for now, there is a sense that this supply-demand imbalance will need to work itself out in the markets.
There is a tendency to see relatively “high” or “low” oil prices as unequivocally good or bad, but the reality is more complex. Most consumers, for instance, love the fact that they don’t feel like they’re getting punched in the gut every time they fill up their gas tanks.
But low prices pressure the significant oil sector in the U.S., and that seeps into the financial system and equity markets as credit becomes stressed. Ideally, we would reach a “Goldilocks” level for energy prices – not too hot, not too cold.
On a global scale, however, the situation is much worse. In many countries, oil revenues are not keeping up with expenses and governments are dipping into their reserves to fund basic services.
One analyst described the situation as a global, economic “Hunger Games” where predatory pricing – the result of active price-cutting or refusal to agree on output – ends up killing off economies one by one. The closest to the edge at the moment is Venezuela, which has had to take to desperate measures to hold off a humanitarian crisis. The country recently adjusted its time zones to save electricity, for instance.
Our View: Given the current situation, with Saudi Arabia and Iran at odds, we do not believe oil prices will rise much further, exacerbating the struggles for oil-dependent economies.
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