Oversupply Continues To Impact Oil Prices

Oversupply Continues To Impact Oil Prices

Oil’s price well deepened even further on Tuesday morning as OPEC officials reinforced their stance against changing output levels.

Oversupply Continues To Impact Oil Prices
Oversupply Continues To Impact Oil Prices

The oil minister from the United Arab Emirates stated that other producers must step up to maintain a healthy market.

“[OPEC] cannot continue protecting a certain price. That is not the only aim of OPEC,” Suhail Mohomed Faraj al-Mazrouei said at an energy event in Abu Dhabi. “We are concerned about the balance of the market but we cannot be the only party that is responsible to balance the market … We aren't going to act irrationally because of the drop in the oil prices.”

Brent crude for February delivery dropped by 3% to near $46 per barrel on London’s ICE exchange. Light, sweet crude futures fell close to a dollar to trade at $44.92 a barrel on the New York Mercantile Exchange.

Standoff between US producers and OPEC
Some analysts have theorized that OPEC’s stance against lowering output is part of a strategy to freeze out US shale oil producers by initiating a price well that US producers will not be able to weather, according to MarketWatch. OPEC has sufficient wealth in reserves to hang on while prices decline, while nations like Russia and Iran have felt the pinch of low oil prices. American producers can withstand a significant decline, but it remains to be seen how long they will hang on for.

As it stands, it seems each power is waiting for the other to blink. Neither wants to cut output for fear of diminished market share, but both would enjoy a price recovery. The US has sought energy independence through greater exploitation of natural resources and innovation within oil-related technologies. Now, that independence will be tested as producers sell oil at or below the breakeven point.

In the meantime, oil’s decline is a fairly sure thing until one of the producers cuts output or some other external factor occurs. Until then, consumers can enjoy low gas prices while they last.

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