How long could the current oil war continue?

By Zhang Jingwei
0 Comment(s)Print E-mail, February 18, 2016
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Cheaper oil [By Zhai Haijun/]

This is a most embarrassing moment for OPEC. The international crude oil price fell below US$26 per barrel last week. This stunning low oil price for all OPEC members is an unbearable difficulty since, in their lengthy oil war, crude oil prices have plunged to the record low for the past 13 years.

A Wall Street Journal report on Feb. 12 said that UAE Energy Minister Suhail al-Mazrouei had announced that, in reaction, OPEC was ready to reduce production and non-OPEC members should also cooperate by doing the same.

This promptly boosted the oil price. The WTI crude futures price for March surged 12.32 percent in the biggest single-day rise since 2009 to close at US$29.44 per barrel. Meanwhile, Brent oil futures for April jumped 10.98 percent to close at US$33.36.

This was not OPEC's first bid to reduce output, although previous ones proved futile. The likely winners this time, however, are the non-OPEC countries and the shale oil industry of the United States, terminating OPEC's longstanding upper hand in the oil market. At the same time, non-OPEC countries are losing patience over this lengthy contention.

The UAE's reason for proposing a "truce" is simple: either everyone reduces output simultaneously or they carry on with the war to the bitter end.

Indeed, OPEC may have miscalculated. In persisting with high production, Middle East countries, as OPEC's core members, are suffering from the resultant low prices. In 2015, Saudi Arabia reported a deficit of a staggering hundred billion dollar scale. Venezuela, meanwhile, is on the brink of bankruptcy.

Iran's reluctance to cooperate is another reason for this internal strife, although it did have a legitimate reason. After the Iran nuclear issue was solved, the Persian Gulf country naturally sought to release the years of pressure from international trade sanctions, so, even at a low price, more exports could still be positive news.

Similarly, OPEC did not expect to see such a strong reaction from Russia, a country stuck in two geopolitical crises - Ukraine and Syria. The United States, although it suspended its shale oil production, seemed unaffected either, as it even lifted a 40-year ban on oil exports.

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