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Digital Subscriptions > The Hedge Fund Journal > Issue 112 - March | April 2016 > Oil Market at a Critical Point – What Next?

Oil Market at a Critical Point – What Next?

Difficult choices lie ahead for Saudi Arabia

T he oil market entered a new era in November 2014 when Saudi Arabia persuaded fellow OPEC members not to support the oil price but to let it fall freely in pursuit of market share. The preceding years of oil prices above $100/b had driven the rapid expansion of high cost production, most notably US light tight oil (LTO or shale oil), and suppressed demand growth.

The oil price fell rapidly from $80/b in November 2014 to $56/b in March 2015. At this point, Saudi Arabia added further downward impetus by raising production by 1 million b/d and a phase of stock build then ensued. By the end of 2015 OECD industry stocks had risen to a record high of more than 3 billion barrels. In January 2016, oil prices tested levels below $30/b.

If, how and when the oil market rebalances will profoundly impact the oil price trajectory into the next decade. The interaction between three critical factors is involved in this process:

• Elimination of excess oil stocks;

• Decline of USA light tight oil (LTO or shale oil) production;

• Saudi Arabia’s policy.

This process and the market and political ‘events’ that could impact it have been analysed using a scenario approach run through a proprietary suite of integrated demand-supply-price simulation models.

Over the last decade, this approach has consistently out performed forecasting by the leading investment banks, consulting groups and the EIA and IEA (Fig.1).

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