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How the Saudi Oil Production Decision Will Impact 2016 Prices

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On Monday, Saudi officials announced the country will not reduce oil output. The move to maintain Saudi oil production marks the second time the country chose to protect market share rather than stabilizeoil prices.

“The only thing to do now is to let the market do its job,” said Saudi Aramco CEO Khalid al-Falih to the Financial Times on Monday. “There have been no conversations here that say we should cut production now that we’ve seen the pain.”

Saudi Arabia’s current plan is to pump more than 10 million barrels a day to lower prices and maintain their global market share.

According to Money Morning Global Energy Strategist Dr. Kent Moors, the OPEC leader’s increased production plan has backfired. The nation has gone from running a budget surplus to a budget deficit, losing billions in revenue each week.

Standard & Poor’s cut Saudi Arabia’s credit rating from “AA-” to “A+” last month, which typically means the country now has a higher risk of defaulting.

“Until a higher (and more resilient) pricing floor can be commanded for crude, the Saudi situation will not improve,” Moors said.

Saudi Arabia’s reluctance to decrease output is putting the country in the same hole as the other cartel members. Small oil-rich OPEC nations like Venezuela need prices at $120 a barrel to sustain their export-driven economies. Right now, oil trades at $46.08 in London.

“OPEC members like Venezuela, Nigeria, Libya, Ecuador, and Iran are experiencing significant financial constriction,” Moors explained last week. “Because the cartel members are all dependent upon oil sales and run undiversified economies, the almost 60% collapse in crude prices hit every one of them hard.”

Of all the small OPEC members, Venezuela has been hurt the most by high Saudi oil production. The country has lost about $36 billion in export revenue over the last 14 months. That’s a 54% decline from its $79 billion average in 2013 and 2014.

Energy agencies are already making doom-and-gloom forecasts foroil prices over the next few years.

But these forecasts miss the point.

Although Saudi oil production will affect OPEC nations and the global energy market, it won’t have a big impact on oil prices…

How Saudi Oil Production Will Affect Oil Prices

Saudi Arabia’s latest announcement has pushed agencies to revise their oil forecasts. Yesterday, the U.S. Energy Information Administration lowered its 2016 WTI crude oil price forecast from $53.57 to $51.31.

But Saudi Arabia flooding the market with more supply will only have a short-term effect on the oil price. That’s because rising global demand will overshadow any Saudi oil production strategy and send prices on a long-term rebound.

That’s why Moors says crude below $50 is just a “short-term consideration.”

The Paris-based International Energy Agency predicts global demand will average 94.2 million barrels a day in 2015. That’s 1.6 million more than last year. Better yet, the agency forecasts 95.6 million barrels a day in 2016.

“Supply won’t be able to keep up with rising demand,” Moors noted in September. “The fundamentals paint a picture of tightening oil supply at a time of increasing demand.”

The Bottom Line: This week’s announcement has investors wondering how Saudi oil production will affect the energy market. Although other OPEC members are at the mercy of Saudi Arabia’s selfish strategy, the excess supply will only have a short-term effect on global oil prices. That’s because demand will outpace supply in 2016 and render Saudi Arabia’s plan futile.

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