Dropping oil prices and testing OPEC resolve Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

November 21, 2014 | Posted by bobbysrinivasan << back to blog

There is a crisis building up among the OPEC countries. It is the price and demand for oil that they are counting on. From a high of around 115$ a barrel, the price has dropped to 77$ a barrel in a very short period of time. It belied all expectations. It was thought that the ISIS Levant movement would create a shortage of oil due to supply disruptions. Now the focus is how the Opec countries will cope with this new reality.
In the last few weeks there have been a flurry of meetings between government officials of Saudi Arabia, Libya, Iraq, Venezuela, Algeria and Quatar. It is not yet known as to whether they plan to cut production. Even if they did Russia is badly in need of foreign exchange. Their foreign reserve of 400 billion is melting away. Besides Russia is expecting zero economic growth in 2015. For other Opec members such as Iraq, Iran and Venezeula that any move to cut output will threaten their revenues and could exacerbate a political and an economic crisis at home.
According to citigroup analysts the drop to $80 a barrel has created a drop of annual revenue of $160 billion. This is a significant sum to cause a recession in some of the Opec countries. The stronger dollar is no help either as this alone could cause severe trade imbalances.
The IEA said that the tension among opec countries was building up and they are meeting in Vienna at the end of this month to decide about production cuts. On the face of it no agreement looks possible.
In the meanwhile the traders in the Chicago Mercantile exchange are loading up with derivative Puts on oil prices for the future month. The risk premium is shooting through the roof. One major concern is that the drop in oil prices should not push down prices of other commodities like natural gas and gold. We Indians have been piling up gold by buying large quantities. If the bottom falls out of gold prices, lots of families will be affected.
To summarize, it is going to be one hell of a winter with the oil prices fluctuating violently. The commodity market is becoming a gambling Casino with rich rewards for the lucky predictors and a blood bath for the losers. Thank you volatility.

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