How Saudi Politics Has Affected Global Markets

With oil demand weak due to weak global growth, particularly in China, and supply plentiful, the oil price has fallen to a level at which US shale oil is uneconomic

Jeremy Beckwith 11 January, 2016 | 12:24PM

Over the last eighteen months, Saudi Arabia’s foreign policy has become extremely assertive, creating major uncertainties for the oil market and the geopolitical situation in the Middle East – both of which are of major significance for global financial markets.

In the second half of 2014, there was a major shift in Saudi policy with regard to the oil market. Rapid growth in US oil output from shale oil deposits, which led to the US no longer being a net importer of oil, stung the Saudis. But they refused to continue to act as the swing producer in the oil market in order to maintain an oil price above $100. Instead, Saudi announced that it would continue to pump oil at full capacity in order to maintain their market share.

With oil demand weak due to weak global growth, particularly in China, and supply plentiful, inventories have soared and the oil price has fallen to a level at which US shale oil is uneconomic. Prices below $60 will see exploration in the US shut down and development of existing discoveries discontinued, though this process has been slow due to US investors providing a lot of capital, both debt and equity, to US shale oil companies in the first half of 2015, believing that the oil price would bounce back towards $100.

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Jeremy Beckwith  is Director of Manager Research for Morningstar UK

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