Who Is Behind The Oil War, And How Low Will The Price Of Crude Go In 2015?

War Peace Sign - Public DomainWho is to blame for the staggering collapse of the price of oil?  Is it the Saudis?  Is it the United States?  Are Saudi Arabia and the U.S. government working together to hurt Russia?  And if this oil war continues, how far will the price of oil end up falling in 2015? 

As you will see below, some analysts believe that it could ultimately go below 20 dollars a barrel.  If we see anything even close to that, the U.S. economy could lose millions of good paying jobs, billions of dollars of energy bonds could default and we could see trillions of dollars of derivatives related to the energy industry implode. 

The global financial system is already extremely vulnerable, and purposely causing the price of oil to crash is one of the most deflationary things that you could possibly do.  Whoever is behind this oil war is playing with fire, and by the end of this coming year the entire planet could be dealing with the consequences.

Ever since the price of oil started falling, people have been pointing fingers at the Saudis.  And without a doubt, the Saudis have manipulated the price of oil before in order to achieve geopolitical goals.  The following is an excerpt from a recent article by Andrew Topf

We don’t have to look too far back in history to see Saudi Arabia, the world’s largest oil exporter and producer, using the oil price to achieve its foreign policy objectives. In 1973, Egyptian President Anwar Sadat convinced Saudi King Faisal to cut production and raise prices, then to go as far as embargoing oil exports, all with the goal of punishing the United States for supporting Israel against the Arab states. It worked. The “oil price shock” quadrupled prices.

It happened again in 1986, when Saudi Arabia-led OPEC allowed prices to drop precipitously, and then in 1990, when the Saudis sent prices plummeting as a way of taking out Russia, which was seen as a threat to their oil supremacy. In 1998, they succeeded. When the oil price was halved from $25 to $12, Russia defaulted on its debt.

The Saudis and other OPEC members have, of course, used the oil price for the obverse effect, that is, suppressing production to keep prices artificially high and member states swimming in “petrodollars”. In 2008, oil peaked at $147 a barrel.

Turning to the current price drop, the Saudis and OPEC have a vested interest in taking out higher-cost competitors, such as US shale oil producers, who will certainly be hurt by the lower price. Even before the price drop, the Saudis were selling their oil to China at a discount. OPEC’s refusal on Nov. 27 to cut production seemed like the baldest evidence yet that the oil price drop was really an oil price war between Saudi Arabia and the US.

If the Saudis wanted to stabilize the price of oil, they could do that immediately by announcing a production cutback.

The fact that they have chosen not to do this says volumes.

In addition to wanting to harm U.S. shale producers, some believe that the Saudis are determined to crush Iran.  This next excerpt comes from a recent Daily Mail article

Above all, Saudi Arabia and its Gulf allies see Iran — a bitter religious and political opponent — as their main regional adversary.

They know that Iran, dominated by the Shia Muslim sect, supports a resentful underclass of more than a million under-privileged and angry Shia people living in the gulf peninsula — a potential uprising waiting to happen against the Saudi regime.

The Saudis, who are overwhelmingly Sunni Muslims, also loathe the way Iran supports President Assad’s regime in Syria — with which the Iranians have a religious affiliation. They also know that Iran, its economy plagued by corruption and crippled by Western sanctions, desperately needs the oil price to rise. And they have no intention of helping out.

The fact is that the Saudis remain in a strong position because oil is cheap to produce there, and the country has such vast reserves. It can withstand a year — or three — of low oil prices.

There are others out there that are fully convinced that the Saudis and the U.S. are actually colluding to drive down the price of oil, and that their real goal is to destroy Russia.

In fact, Venezuela’s President Nicolas Maduro openly promoted this theory during a recent speech on Venezuelan national television

“Did you know there’s an oil war? And the war has an objective: to destroy Russia,” he said in a speech to state businessmen carried live on state TV.

“It’s a strategically planned war … also aimed at Venezuela, to try and destroy our revolution and cause an economic collapse,” he added, accusing the United States of trying to flood the market with shale oil.

Venezuela and Russia, which both have fractious ties with Washington, are widely considered the nations hardest hit by the global oil price fall.

And as I discussed just the other day, Russian President Vladimir Putin seems to agree with this theory…

“We all see the lowering of oil prices. There’s lots of talk about what’s causing it. Could it be an agreement between the U.S. and Saudi Arabia to punish Iran and affect the economies of Russia and Venezuela? It could.”

Without a doubt, Obama wants to “punish” Russia for what has been going on in Ukraine.  Going after oil is one of the best ways to do that.  And if the U.S. shale industry gets hurt in the process, that is a bonus for the radical environmentalists in Obama’s administration.

There are yet others that see this oil war as being even more complicated.

Marin Katusa believes that this is actually a three-way war between OPEC, Russia and the United States…

“It’s a three-way oil war between OPEC, Russia and North American shale,” says Marin Katusa, author of “The Colder War,” and chief energy investment strategist at Casey Research.

Katusa doesn’t see production slowing in 2015: “We know that OPEC will not be cutting back production. They’re going to increase it. Russia has increased production to all-time highs.” With Russia and OPEC refusing to give up market share how will the shale industry compete?

Katusa thinks the longevity and staying power of the shale industry will keep it viable and profitable. “The versatility and the survivability of a lot of these shale producers will surprise people. I don’t see that the shale sector is going to collapse over night,” he says. Shale sweet spots like North Dakota’s Bakken region and Texas’ Eagle Ford area will help keep production levels up and output steady.

Whatever the true motivation for this oil war is, it does not appear that it is going to end any time soon.

And so that means that the price of oil is going to go lower.

How much lower?

One analyst recently told CNN that we could see the price of oil dip into the $30s next year…

Few saw the energy meltdown coming. Now that it’s here, industry analysts warn another move lower is possible as the momentum remains firmly to the downside.

“If this doesn’t hold, we could go back to price levels in late 2008 and early 2009 — down in the $30s. There’s no reason why it couldn’t happen,” said Darin Newsom, senior analyst at Telvent DTN.

Others are even more pessimistic.  For instance, Jeremy Warner of the Sydney Morning Herald, who correctly predicted that the price of oil would fall below $80 this year, is now forecasting that the price of oil could fall all the way down to $20 next year…

Revisiting the past year’s predictions is, for most columnists a frequently humbling experience. The howlers tend to far outweigh the successes. Yet, for a change, I can genuinely claim to have got my main call for markets – that oil would sink to $80 a barrel or less – spot on, and for the right reasons, too.

Just in case you think I’m making it up, this is what I said 12 months ago: “My big prediction is for $80 oil, from which much of the rest of my outlook for the coming year flows. It’s hard to overstate the significance of a much lower oil price – Brent at, say, $80 a barrel, or perhaps lower still – yet this is a surprisingly likely prospect, the implications of which have been largely missed by mainstream economic forecasters.”

If on to a good thing, you might as well stick with it; so for the coming year, I’m doubling up on this forecast. Far from bouncing back to the post crisis “normal” of something over $100 a barrel, as many oil traders seem to expect, my view is that the oil price will remain low for a long time, sinking to perhaps as little as $20 a barrel over the coming year before recovering a little.

But even Warner’s chilling prediction is not the most bearish.

A technical analyst named Abigail Doolittle recently told CNBC that under a worst case scenario the price of oil could fall as low as $14 a barrel…

No one really saw 2014’s dramatic plunge in oil price coming, so it’s probably fair to say that any predictions about where it’s going from here fall somewhere between educated guesses and picking a number out of a hat.

In that light, it’s less than shocking to see one analyst making a case—albeit in a pure outlier sense—for a drop all the way below $14 a barrel.

Abigail Doolittle, who does business under the name Peak Theories Research, posits that current chart trends point to the possibility that crude has three downside target areas where it could find support—$44, $35 and the nightmare scenario of, yes, $13.65.

But the truth is that none of those scenarios need to happen in order for this oil war to absolutely devastate the U.S. economy and the U.S. financial system.

There is a very strong correlation between the price of oil and the performance of energy stocks and energy bonds.  But over the past couple of weeks this correlation has been broken.  The following chart comes from Zero Hedge

 

Energy Stocks - Zero Hedge

 

 

It is inevitable that at some point we will see energy stocks and energy bonds come back into line with the price of crude oil.

And it isn’t just energy stocks and bonds that we need to be concerned about.  There is only one other time in all of history when the price of oil has crashed by more than 50 dollars in less than a year.  That was in 2008 – just before the great financial crisis that erupted in the fall of that year.  For much, much more on this, please see my previous article entitled “Guess What Happened The Last Time The Price Of Oil Crashed Like This?…

 

Whether the price of oil crashed or not, we were already on the verge of massive financial troubles. But the fact that the price of oil has collapsed makes all of our potential problems much, much worse. As we enter 2015, keep an eye on energy stocks, energy bonds and listen for any mention of problems with derivatives.  The next great financial crisis is right around the corner, but most people will never see it coming until they are blindsided by it.

Disclosure: None.

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Ratilal Shah 7 years ago Member's comment

The Oil Price drop will be good for the Indian economy/public as it will stop the new Modi Govt. from increasing taxes under the pretext of meeting the rising Oil Import Bill. However, the drop in international price must be passed on fully to the common man by reducing gas/diesel/petrol prices and consequently taxi/rixa/bus fares all over India. The profit of the Indian Oil Importing companies must have a cap of max. 10% and the dividend on their shares which are mainly held by their employees must also not exceed 10%.

Vincent Guesthouse 7 years ago Member's comment

India is a socialist country and due that bureaucracy and regulations kill common man. Pray for deregulation and free markets and prices will fall quick.

Vincent Guesthouse 7 years ago Member's comment

socialism brings to the world many sick people. Sick minds bring sick ideas. The world is always in equilibrium. When one party loose something the other party has a gain.. Lower oil prices will benefit billions of people world wide. Lower cost of energy brings cheaper food prices, cheaper energy and many new jobs. Low oil price brings peace as world thugs have no money to finance wars.There are so many reasons to pray for lower oil prices and so few limited outcomes which do not impress me. Thank you Lord for low oil prices. GBU

Carmelita Madara 7 years ago Member's comment
I go for lower oil prices because it will surely ibenefit the people because it will result in reduced prices of goods and services.
Ahmed Habel 7 years ago Member's comment

The Oil War

International Technocrat 7 years ago Member's comment

I agree

Vivek Jaiswal 7 years ago Member's comment

I agree. Low oil prices are a conspiracy by USA and Arabia to drive Russia bankrupt. They are using this as an economic weapon and not getting into a war over Ukraine

Vincent Guesthouse 7 years ago Member's comment

Ha ha ha.

You wish so.

In reality it is just oversupply.

O Bama and USA has to many lobbyist from energy sector.

Thank you to the free market rules, and capitalism even if we see just fraction of free market we all have huge benefits.

Of course i truly hope Russia will go bankrupt and will stop invading other countries

James Warbrick 6 years ago Member's comment

ithought it was the USA that was invading other countrys

Alexis Renault 7 years ago Member's comment

I don't think it's a "conspiracy," I think its a very wise strategic move on their part to pressure not only Russia, but Iran and Isis. And I think its working.

Iain 7 years ago Member's comment

Olí price usually does exactly the oposite of what all the so calles expert analysts at the banks say.

Rideline 7 years ago Member's comment

Whoever behind this, doesn't matter..... it'll ultimately benefit the general people from third world countries, transport businessmen and private car service providers.

Dick Kaplan 7 years ago Member's comment

Couldn't agree more!

Jagar Singh Sarohi 7 years ago Member's comment
no one however mighty can change the direction of destiny of the GLOBE then the globe itself in the long run all are left behind/out than the course the globe will take as the part of the NATURE it itself is...where
Qué Bróker Elegir? 7 years ago Member's comment
Saudis are behind the oil war.
I.Damodara Reddy 7 years ago Member's comment

Dear ALL Brother's/Sister's of this SO CALLED DEVELOPED World. ALL World Economy& People are depend on each other for one or other product/services. If some one abnormally raise the product/service price, for short term every one buy it to meet the requirement. For long term every one will take a alternative actions, which will effect the economy of dictator, the same is happening TODAY for all Economy., who charge the exorbitant Product price/service to others to LOOT others will not SURVIVE long. Therefore, all has to think about Over all World economy and help OTHERS to grow by normal way NOT with ABNORMAL prices. ABNORMAL way charging price of a Product/Service will not sustain LONG, IT WILL COLLAPSE on any day. The same happen for OIL Prices. Any one want to destroy other countries ECONOMY by increase the RATE's and earn abnormal profits will not stay LONG in their hands. Even the King/Presidents of ALL World Countries think of other COUNTRY PEOPLE also our Neighbors and live like US without any Problem, ALWAYS HELP and NOT DESTROY. Every one think positively and co-operate for others development for long term,not short term GAINs. LIVE and LET LIVE Others without any DECEITFUL Motive. Deceitful ways will ALWAYS FAIL and PERISH one or other way. SO ALWAYS HELP OTHERS and NOT TO DESTROY even single person or state/country, the same repeat and happen to every one as a cycle. Be AWARE this is a CYCLE of NATURE. No ONE country/person is Great in this NATURE.TREAT THE NATURE and SAVE NATURE for ALL HUMANS SAFE/SECURE and BETTER TOMORROW. With Best Regards to ALL. idamodara reddy