How OPEC's Bad behaviour Could Send Oil Prices Into A Self-Reinforcing Tailspin


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:

Hellenic Shipping News:

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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