How OPEC Lost Control of Oil Prices

Asad Dossani
OPEC recently decided that $50 per barrel is the new 'right' price of oil. Oil prices rallied in response. The long-awaited supply cut may be just around the corner...

Just two years ago, OPEC decided that $100 per barrel was the 'right' price. Frankly, I don't know why they didn't shoot for the moon - $200 per barrel or $400 per barrel is even better, right?

There was a time when OPEC was king. Large enough to set prices. Large enough that the oil market was effectively a cartel. A small number of countries colluding to fix the price of oil.

The 1970s were the peak of their power. For example, the embargo in 1973 led to a fourfold increase in the price of oil.

Cartels suffer from an inherent problem. The non-member producers get a free ride. They produce as much as they can while earning high prices. And OPEC doesn't mind so long as the free riders are sufficiently small.

The boom in US shale production fundamentally altered the market. Supply increased and prices started to fall. Previously, when prices fell, OPEC responded by cutting output to maintain the $100/barrel 'right' price.

At some point, OPEC had enough. Why cut output to help the US shale producers? Why cede market share to a higher-cost producer? Unbound by the need to cut production, they did the opposite. Keep pumping oil. Drive prices down. Squeeze the higher cost producers out of business.

The strategy is working too. US shale oil production is in decline. After all, they're losing money at current oil prices.

OPEC has decided to retain market share. But in doing so, they've given up control of oil prices.

Conventional wisdom tells us that cartels are bad. But one of OPEC's positive contributions was stable oil prices. Increase supply when prices went up too much. Decrease supply when prices went down.

We may not have liked $100 per barrel oil, but we did like the stability.

But OPEC is no longer the stabilising force they once were. Today, crude oil's volatility is higher than ever. Prices routinely move a few percentage points in a day. We now have lower oil prices, but we have higher volatility.

We struggle to explain why crude oil moves so much so fast. Faster than ever before. But remember that the market has lost its stabilising force. OPEC has lost control of oil prices.

I've been recently analysing the behaviour of oil prices. Understanding what makes them go up or down. Understanding how their behaviour has fundamentally changed. And of course, understanding how to profit from it.

We make regular recommendations on crude oil at Alpha Trader. We're in and out of the market for quick easy profits.

And the recent volatile swings have been great for traders. More volatility means more chances to profit. More chances to buy crude on its way up, and sell it on its way down. Now that OPEC no longer controls oil prices, the market is ripe for traders to reap the benefits.

How OPEC lost control of oil prices? Club or share your comments here.

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2 Responses to "How OPEC Lost Control of Oil Prices"
Varun N
18 Mar, 2016
The title of the topic is to grab attention, the content is to get subscribers :-)Like (1)
Akshat
12 Mar, 2016
How OPEC lost control...no answer Sir..u only said traders dominate the prices...which i dont think is only dynamics in the oil prices...a better analysis of shale gas (production cost/avg. production/), economic analysis is required to answer a million dollar question: How OPEC lost controlLike (1)
We request your view! Post a comment on "How OPEC Lost Control of Oil Prices". Click here!