Why the Oil price is set to slide
On 27 June I told Money Morning readers I expected the oil price to drop.
That week saw the oil price start a slide which has been its longest downturn in three years!
As you can see, the oil price has had seven weeks of downturns following end of June. This past week has seen it halt the decline, but I don't foresee this as a sustained upturn.
Simply put - oil shouldn't trade above $70 a barrel!
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OPEC production cuts are coming to an end
Following the 2015, 2016 downturn in oil prices, OPEC cut production by 2 million barrels of oil per day.
But the US still increased oil production right through this time…
Now however, with the higher oil price OPEC leaders are struggling to hold their ranks, with all the members wanting to increase oil production again.
For instance, in July Saudi Arabia pumped near record volumes of oil, increasing production by 230,000 barrels per day.
And according to an Oilprice.com article, new agreements in OPEC will make way for OPEC members to again increase oil production by as much as 1 million barrels per day in total.
OPEC members are fighting about oil quotas
There exists unhappiness among OPEC members as to how quotas are set, and the power the Saudi’s have in decision making in the organization.
Two weeks ago, Iran filed a formal complaint with OPEC regarding the distribution of quotas in OPEC – and with Non-OPEC members.
Iran, which only recently received the right to freely trade its oil, is extremely dissatisfied with the fact that OPEC and a number of non-member countries, including Russia, which agreed at the end of 2016 to reduce oil production by 1.8 million barrels per day, are now redistributing quotas.
The Iranians said: “OPEC production quotas are a formal agreement between states that must be formally observed by all members of the organization, depending on the capability of each individual exporting country. However, in practice this is not always the case. For example, Saudi Arabia, the world’s largest oil exporter, as well as its allies from the Cooperation Council of the Arab States of the Persian Gulf (GCC), cast a shadow over the agreements reached within OPEC. And other members are forced to inevitably coordinate their actions with the decisions of the OPEC monopolist – the Kingdom of Saudi Arabia”
Iran is also concerned about possible trade embargo’s set by President Donald Trump – which could come into effect in November this year.
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Saudi Arabia and Iran’s price war could break OPEC apart
Saudi Arabia, Iran’s arch-rival in the Middle East, has been a passionate supporter of President Trump’s intention to pull out of the nuclear deal with Iran and reimpose sanctions. This support is not simply on ideological or religious grounds, it also has a purely economic motive: the less Iran crude there is for sale, the more consumers will buy from Saudi Arabia.
While analysts argue whether Iran’s threats have any teeth, oil demand news from Asia is giving OPEC another cause for worry. Slowing economic growth is dampening oil demand growth and both the Chinese yuan and the Indian rupee are falling against the dollar. This is as a result of the economic developments in both Asia and the United States, whose economy is growing so fast that some are beginning to worry that it will soon run out of steam.
So, OPEC’s internal fractures are deepening and likely to deepen further because Saudi Arabia and Iran are highly unlikely to put down their arms, even if it means cutting prices to uncomfortably low levels.
A price war between Saudi Arabia and Iran could effectively put an end to OPEC
Iran has already voiced its strong opposition to the reallocation of individual member quotas suggested by Saudi Oil Minister Khalid al-Falih.
Should OPEC break apart we would see much more competitive oil markets. Countries would produce oil at the maximally productive rate, instead of reigning in oil production and manipulating price higher.
What lower oil prices would mean for you and I
Oil prices will halt their gains and could be headed even lower from here. And that’s without OPEC breaking apart. Any oil price gains will simply be on the back of once off blips.
Locally a lower oil price will curb inflation, especially now that the rand has weakened again. We need a lower oil price otherwise fuel prices will rise disproportionately.
Lower oil prices mean cheaper mining and agricultural costs.
They also mean more money in the pocket of the consumer as transport costs drop.
And, if you’re still an oil bull all I can say to you today is: Renewable Energy is coming for oil’s spot…
Here’s to unleashing real value
Editor, Red Hot Penny Shares
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