A recent study from the University of Illinois has been done that suggests that the oil market is finally starting to make sense as prices continue to fall. The study states, “Saudi Arabia may be trying to eliminate US shale producers with low prices.”
One of the main reasons many believed that Saudi Arabia was not going to cut production was because they wanted higher oil prices so they could sell their crude oil. However, this study suggests they are trying to eliminate American shale producers with a continued drop in prices.
The University of Illinois points out a few problems associated with this strategy, including an oversupply of global crude, but also the possibility that Saudi Arabia’s success is short-lived if US shale producers can slow down or stop investments now that prices have fallen.
They also believe that if Saudi Arabia’s oil market strategy is successful, the government will be forced to reduce energy subsidies over time, which could do further damage to its economy.
The article brings up a lot of good points about what is going on in the global oil market, but I find one key point missing from the whole discussion. The reason that Saudi Arabia isn’t already trying to eliminate US shale producers is that it will create too much of an oversupply in the market which would drive prices down even more.
This study, however, is assuming that they are succeeding in doing so when in reality, they haven’t been able to do so yet.
I have a hard time believing that the market is going to get tighter at any point in the near future, regardless of what Saudi Arabia has been doing. As I have stated before though, this strategy may work overtime, but not quickly enough to save their economy from being hurt even further by low oil prices.
More US shale producers are not going to be in the market producing oil by the end of next year, and if prices were to stay low throughout 2016, many producers would cut back on production. This includes both US shale producers and OPEC countries.
I do believe that at some point, either US shale producers will leave the market because they cannot sustain their businesses anymore, or Saudi Arabia will not be able to continue producing as much oil as they have been. In either case, the market will become tighter as production slows down or stops completely.
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