Oil has recovered from its flash crash last week, but it has by now breached key psychological levels.
Moreover, lower prices could counter-intuitively beget increased supply as many OPEC members could now be forced to cheat on their production quotas even more so than before in order to support their national budgets:
According to OPEC’s leading official, now that oil prices have fallen to $68-70 per barell, the first line of defence will be a better compliance. But if OPEC members cheat on exporting volumes when prices are high, things are more difficult when prices falling under the psychological level of $70 per barrel as their revenues are also falling.
At the same time, another problem for OPEC members is that non-OPEC supply is rising in a fast way especially from Russia.
Lower prices could push higher production beyond quotas, which push down prices even further, etc. Could this create a self-reinforcing cycle for the next, say $10, of downward action for oil prices?
There’s probably a limit to this kind of behaviour, but some OPEC members aren’t in the best of shape, such as Venezuela. Thus OPEC non-compliance could increase until it gets too obvious, via crashing oil prices, at which point OPEC members would be forced to come back into line with their cartel.
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