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Two weeks ago, on Equity Guru’s Discord Channel, I mentioned this break of an important level on oil and provided these two target zones. We are rapidly approaching our final target of the 21 dollar zone.
News came out about Russia not wanting to cut production, and their disagreement with OPEC…mainly Saudi Arabia. The Saudi’s then increased production to flood the market with more oil to lower prices in order to hurt Russia and entice them to come back to the OPEC+ Russia table. Wondering who the OPEC members are? You can find them here: https://www.opec.org/opec_web/en/about_us/25.htm
In reality, the Russians knew a recession was coming, which means lower demand for oil. In a world with a large supply of oil, this would force prices down. The Russians wanted to produce as much oil as they could to sell at current market prices, to make as much money as they can. They knew a production cut would not support the prices of oil up…it rarely does.
This is where we look at OPEC and game theory. OPEC members have to agree to a production cut, but more importantly, have to agree on which member(s) will cut their production. When members agree on a production cut, and oil prices do rise…there is an incentive to cheat. So if supply is cut, but demand for oil remains the same, there is an incentive for a member to actually produce the amount of oil they were producing pre-cut and sell it at these HIGHER prices. Other members either find out, or they do the same, and then you go back to where you began before the cut. Supply is brought back to the original amount, and prices fall to where they were pre-cut.
These past few years, the Saudi’s were the ones leading these production cuts but were annoyed the Iranians did not do the same. What this meant was as long as the demand for oil remained, the Iranians began stealing Saudi market share. I am sure the Saudi’s voiced this displeasure to the Americans, and perhaps have influenced recent American foreign policy in the Middle East region…especially towards Iran. Remember, it was Saudi Arabia under King Faizal who agreed to this PetroDollar system, where the US Dollar became the currency for energy payments.
-Special Contributor, Vishal Toora