For over a year, OPEC and Western frackers and others have been vying for market share of the world's oil market, with both of them losing tens of billions of dollars producing and selling oil into a market that is only paying a fraction of their costs. OPEC is about to capitulate, by curbing supply to force prices up and save themselves at least for now. In the longer run, we are looking at the dawn of the age of cheap oil, at least compared to what we have been used to over the last decade.
Look at what happened only 8 years ago.
The price of oil rose to over $140 a barrel in the summer of 2008, only to collapse to well below $40 a barrel five months later. All that was needed to drive the price up again to $80 a barrel within a year, and to over $120 a barrel by the end of 2010, was a fractional cut in production by OPEC. See here for how a 5% cut in production by OPEC reversed the last price slide, illustrating how a small cut in oil supply will drive a very big price appreciation in oil.
http://www.nytimes.com/2009/01/26/business/worldbusiness/26opec.html?_r=0
OPEC knows that this time the stakes are bigger. If they cut production, they will lose market share to the frackers and others in the long term. But their medium term prospects are too bleak to accept without some sort of a policy response. What are those medium term prospects? At present prices, some OPEC countries are already bordering on bankruptcy, and even Saudi Arabia could be out of money by 2020 (See immediately below). This would spell massive internal turmoil in these countries where the political classes have bought loyalty with oil money for decades.
http://www.news.com.au/finance/economy/world-economy/imf-predicts-saudi-arabias-cash-reserves-will-deplete-in-five-years/news-story/6cbff89b30916056744ed541c35d97fa
OPEC has way more to lose from this battle than their opponents do. They have been fighting it out to protect market share with below cost oil for over a year, and they will not continue to do this for much longer. With 600,000 barrels of Iranian oil about to flood the market, the time is ripe for OPEC to get together for one last massive manipulation of the world's most manipulated commodity (except for Gold?).
OPEC is not supposed to meet again until June, but Venezuela is clamouring for a meeting as soon as possible, and Iraq has been offering to arrange a meeting to smooth relations between Iran and Saudi Arabia. If these countries meet for ANY reason, it will only be about cutting the supply of oil to world's markets to drive up the price. In fact, I suspect that they will meet in secret to get this done, as they will not want to advertise this manipulation to their opponents.
In short, continuing to think that the price of oil will stay low is the same as thinking that Saudi Arabia, Venezuela, Russia, Iran, Iraq and others are comfortable with the prospects of national bankruptcy within the next very few years. Of course, they will not stand pat and let this happen if they can possibly prevent it. The price is going up again...soon.
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