WHAT MAKES THE OIL PLUNGE?
Idle deep wells. New drilling technologies. OPEC’s false promises. These are the factors that make oil prices slump.
Oil companies keep drilling new wells. In the United States alone, more than 4,000 idled wells. Expect these deep wells to be drilled should a company bottom in the oil bear market. Also, supply will continue to surpass demand amidst sluggish global economic growth.
Shale fracking firms try out different methods or techniques to extract more crude from the ground despite oil prices hitting its lowest lows. Incidentally, Goldman Sachs has been very precise on projecting the direction of oil prices. Its analysts expect the price to drop to $20 or lower. However, if their prediction is proven wrong, these oil companies will scramble to open new fracking sites, aggravate oil supply, and cap the price.
We may point our fingers at hefty oil glut that is almost immeasurable. Recently, a chairman of a major oil firm announced they would fill swimming pools with crude. That is how immeasurable the glut is. One of the causes for oil oversupply is the availability of new and improved shale fracking technologies, specifically in America.
The US Gulf Coast is overinflated with inventories. Cushing city in Oklahoma, the delivery center for settling oil futures on the Chicago Mercantile Exchange and the world’s pipeline junction, is nearly running out of space. And as a result, the Gulf of Mexico’s floating storage is extensively used. Floating storage becomes only inexpensive when the crude market enters a super-contango phase, in which futures prices is higher than expected.
And lastly, never expect OPEC to limit oil production. Why? Competition. Saudi Arabia is using cheap oil to push shale frackers in the United States away from the industry. Quite understanding, but oil prices have reached its lowest and the organization wants to survive this ordeal.
Picture this: what the kingdom wants is to score a great bargain with Russia in order to bolster oil and freeze production. Unfortunately, it will never happen. Just imagine the cheating among some OPEC member states that do not follow mandates.
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