News had surfaced that the recent fall in oil price was primarily driven by unabashed shorting by none other then Sovereign Wealth Funds (SWF) from OPEC. Sources believed that the shorting was sponsored by two of the largest SWF in the world: SAMA Foreign Holdings (Saudi Arabia) and Kuwait Investment Authority, which was done through a series of intermediaries. This subsequently led to further shorting in the market by other funds which noticed the trend. Eventually oil gave up more than US$13 per barrel in three short weeks.
Here's the BIG question: Why would OPEC shoot itself in the foot?
We can only deduce the reasons why.
1) When oil was trading above US$60 per barrel we saw three weeks of consecutive increase in oil rigs being put to work in the US. This means that some shale oil companies are comfortable to generate profit at that level. Perhaps the short was a means to remind the shale oil companies that the game was not over yet.
2) Many shale oil companies will have their credit line and financing reviewed by financial institutions in October. This is perhaps a strategy to force them to sell their assets in the event of any financing being withdrawn or greater collaterals being demanded by the financial institutions. Meanwhile many shale oil companies are cutting their reserves level, which will impact their balance sheets.
3) Incidentally, Saudi Arabia and Russia will meet on 30 July to discuss about Iran, OPEC and price of oil. Saudi Arabia had indicated previously that they had spoken to Russia to reduce their oil output but the Saudi Arabia's request was refused. Subsequently oil price plummeted and Russia is now in recession. In a report by Daily Telegraph, Russia could be bankrupt if oil price continues to stay this low till the end of 2016. Perhaps this was a means to get Russia to agree to a cut in production.
Yesterday we discussed about the Iran implications. As new reports surface, it seems the game of chess is being slowly revealed one piece at a time. I for one, believe that the OPEC countries need to boost up the price of oil fast as all are running on a budget deficit due to their respective country's welfare system. To do that, they must eliminate the threat of the shale oil companies as a major producer.
The above is just my opinion.
Link: http://www.marketoracle.co.uk/Article51581.html?
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