The truth is that with or without an agreement, oil markets will eventually balance out. Moreover, the agreement on the table wouldn’t have been enforced too strictly. The result is clear: oil prices will remain subdued for a longer period of time, but they are bound to recover. Current prices have high cost producers aching. The industry is shifting all its production capacity towards low cost production, which effectively guarantees that countries like Saudi Arabia will be able to increase their market share before prices recover.
This does not bode well with most North American producers, especially shale oil and oil sands producers. A prolonged price slump may also cause a steeper price fluctuation once oil prices start recovering. This might also benefit OPEC countries once oil price recovery starts, but in the meantime, the move will just serve to negate Iranian market share recovery for a relatively short period of time.
In the meantime, low oil prices will contribute to deflationary pressures in Europe and Japan. They may also influence monetary policy in the US. It is hard to imagine how the Fed will switch to a more aggressive rate hike approach if inflation targets are not met due to low oil prices. In any case, this doesn’t seem to bother the Saudis and their regional allies, which are more interested in gaining the upper hand in their regional struggle with Iran.
The rest of the world will continue to feel the ripple effects of this regional feud in the meantime. Investors should be aware of this and should keep an eye on oil storage reports to gain a better understanding of when the oil glut might be over. Markets will eventually rebalance, and rising demand will take care of some of the distortion created by Saudi policy.
