OPEC Has Surrendered

The news today is that oil prices are down again. But I think the more important news is that OPEC no longer effectively exists. They’ve surrendered. Of course, there’s still something called OPEC and it will continue to be influential. But at a very basic level, if a cartel can’t or won’t control prices, then it’s not a cartel. There’s really not much else to say.

The new production limits are limitless. Plus, there’s the issue of Iranian oil coming back online at some point. The giant as always is Saudi Arabia, and if they wanted, they could unleash a massive supply of oil onto the world. We’re seeing a rift grow between the core members of OPEC and the more marginal players (the ones like Ecuador or Venezuela which I always forget are in OPEC.) The marginal players are losing and badly.

In the U.S., the junk bond market is closely tied to oil production. As oil has fallen, junk bond spreads have increased. Again, it’s very basic. As long as the money flows, the oil will flow. As far as the U.S. is concerned, that funding will continue to dry up.

Posted by on December 7th, 2015 at 11:12 am


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