Oil prices recently entered a bear market, with prices for Brent crude yesterday capping a 20% decline from their most recent highs. This has been a major source of stress for shareholders of ASX oil giants, such as Woodside Petroleum (ASX:WPL), Santos (ASX:STO) and Oil Search (ASX:OSH). The main cause of the drop was concerns over economic stability and not an oversupply of the commodity. To make matters worse, US stockpiles of oil stopped declining and started increasing. Additionally, if the trade war deteriorates to the point where China buys Iranian oil to sabotage US efforts aimed at isolating the rogue state, oil prices could enter a tailspin. Brent crude peaked late in April and declined thereafter as concerns over the global economy intensified.
The futures market, however, jumped 3.2% after the close in New York after bullish comments from Saudi Arabia, erasing most of the 4.7% decline the previous day. Saudi Arabia announced, through spokespeople, that they will not tolerate such significant falls in oil prices and all options for intervention in the market would be on the table. Saudi Arabia has always occupied a lead position in OPEC, a cartel of oil-producing countries, and is currently producing less than its allocated quota.
Saudi Arabia has historically exercised a high degree of pricing power through its influence on OPEC. In the past, this has continued to the point of tripling the price of oil overnight in the 1970s and causing years of stagflation around the world. Their influence within OPEC has declined with rising conflict in the Middle East and increased disputes within OPEC as to how oil production quotas will be allocated. US shale production has created another avenue for customers to a lot of pricing power through OPEC. This has declined because of disputes within the cartel and US shale production, which has kept oil prices in a narrow trading range.
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