Oil reaching 7 year low as OPEC members abandon production limits

Oil prices are getting nearer from the 2008-09 crisis level of  $33.98 per barrel as Iran is expected to export more oil as sanctions are lifted, beginning next year. OPEC members have not agreed to put a cap on their respective outputs.

As a consequence, speculators are increasing their short positions and test when action would be taken by producers as oil prices are still seeking support. Oil prices have indeed dropped by 33% year-to-date.

Oversupply here to stay

Saudi Arabia, the largest OPEC producer cannot reduce production as the desert kingdom wants to defend market share against some OPEC member like Iran and non-OPEC members too.

Indeed, Saudi Arabia represents 32% of monthly OPEC estimated production, whereas Iran is at 8.7% with the sanctions in place.

2 Million Barrels of production has been added from the mid-2014 level of 30 Millions Barrel per day, to reach 32 Million barrels per day on November, without taking into account

The demand side is not helping

According to Bloomberg.com, China’s apparent oil demand fell 1.1% to 10.19 millions barrels per day, in November. The main driver of oil consumption  growth in the past 5 years, is not supporting anymore and this is an additional downtrend supporting justification for speculators to increase their short positions.

The recent climate deal would also lead to a lower of demand expectations for oil and hence the oil prices back to levels of $100 per barrel would look as a far history . The deal sends a economic signal that fossil fuels will be impacted with financial and legal premiums to remain part of the energy mix, and clean energy will enjoy subsidies. This agreement means that a fundamental shift of investments towards renewables, energy efficiency (both oil demand bearish).

On its last report, Credit Suisse mentioned that investors are most bearish they have been on oil since 2008. In this environment, a lot of bearish scenarios can be considered including oil reaching $30, $20 or even $10…

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