The commodity enjoyed a big run earlier this year in a move that climaxed in June when it traded at US$113.19/bbl. Geopolitical risk was the main driver of the lunge from around US$95/bbl to the June highs. However, global growth concerns and some ‘price wars’ have been the key factors behind the unravelling we’ve seen lately.
Saudi Arabia, the world’s largest oil exporter, has been the main driving force behind the price moves, and this week cut its prices to the US market while simultaneously hiking them in Asia. OPEC countries have been battling for market share due to an overcrowded market, particularly as shale production in the US saw demand for oil drop.
The battle for market share in the US came after key producing nations had already fought it out in Asia with prices being slashed four months in a row. OPEC is on a mission to rebalance the market and perhaps rein in on production. However, it seems Saudi Arabia has presented some resistance and until this is resolved, we could see further oil weakness.
The bottom line is the longer this goes on for, the further oil is likely to deteriorate. While it seems increasingly likely OPEC will reach an agreement to cut production at some point, there are still a few factors to play out, including the Sharara field in Libya coming back online. From a price action perspective, the key will be for oil to hold onto US$80/bbl. A break of this level will leave it quite vulnerable and is likely to result in further losses. Some analysts have gone as far as predicting prices to drop to around US$65/bbl in the near term.