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Will Saudi Arabia End the Bear Market for Oil?

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

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.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978) (“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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