This is a great read on the oil markets and how to incorrectly extrapolate data.
One of the hot topics of recent weeks is the price of oil. In fact, this morning, oil prices hit a new low for the year.
The reason for this is simple: too much supply. As this article does a great job explaining the dynamics of the oil markets, I want to focus on a related topic: the relationship between market share and production. OPEC typically attempts to buffer prices and maintain OPEC market share by negotiating/setting caps on the amount of oil that can be produced by member nations. As an aside (because some people ask this), the U.S. is not allowed to join OPEC (thank goodness!) because we have laws against price fixing. More importantly, by capping production, OPEC can manipulate the price of oil within a range. So the question is, why has OPEC allowed the price of oil to collapse in recent years? The answer is simple: market share.
In the 1980s Saudi Arabia attempted to support prices by cutting output. Unfortunately, the already sizable glut and new production from other countries offset these efforts. Long story short, Saudi Arabia gave up market share by cutting supply. This time around, Saudi Arabia will not make the same mistake and they have continued to pump out oil as prices have came down. A recent example of this is the chart below.
As you can see, in this case, Nigeria’s supply decreased significantly (not by choice, but rather due to disruption). At the same time the U.S. was able to increase output and fill this gap in the market. This does not, however, make the U.S. an oil superpower. This was an opportunistic moment for oil producers.