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December 1, 2014

I see two possibilities behind OPEC’s decision to maintain its 30 Million Barrels Per Day quota. I am surprised that no one is giving consideration to the political factor. We should not ignore the Russian factor, as sanctions and world pressure is apparently having minor impact because of its financial strength. Though economic conditions at home is off the track, but Russian to response too, is hurting quite a few economies, which may soon exhaust.

Hence, there could be a possibility that one or two strong OPEC member was asked to take a lead and maintain oil production at full swing to bring the prices down. Since Russia produces around 10 million barrels per day, a drop of $ 30 in price on monthly basis would reduce its oil income by $ 9 Billion. It could be combined dose, as large part of Russian FX Reserves is in Euro and Gold. The commodity prices is also on the decline, which may he hurting. Overall, this combination looks more effective than sanctions on Russia.

The other possibility could be strategic to counter shale production, which is likely to increase in coming months. Since, it is now a known facts that the cost of shale oil is sharply down than earlier estimates. Therefore, instead of wasting more time, OPEC members were quick to respond, despite knowing that they will have to take the hit, but they opted to unsettle shale producer. The timing also looked appropriate due to Calendar year end. it will help them to prepare fresh budget according to new pricing.

Further, in their next meeting they will have a clearer picture, as market should stabilized by that time.

Meanwhile, I see no reason for oil prices to recover, as odds are not favoring quick recovery soon. China may be buying oil for strategic purpose, but decline in PMI is another blow. Today’s German Markit Manufacturing  PMI dented hopes of recovery, increasing risk for further slide. In medium term failure to move beyond 75-78 risks for a drop to 61.50. But 55-58 levels should hold or else oil could crash to test 38.40

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