A Global Game of Chicken

11/21/2014 12:01 am EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

Nearing the OPEC meeting at the end of the month, MoneyShow's Jim Jubak is watching the key global suppliers of oil to see if anyone will cut production as prices keep dropping.

For the week ahead, let's watch the global game of chicken among oil producers. This is on the supply side of the market.

Basically, we've got a glut of oil and the question is, is anybody going to actually cut back on production? So far, it looks like the answer is no. The Saudis, in October, actually increased production by about 1% instead of cutting it back. It looks like they were trying to put pressure on US shale oil producers. What's going on there is exactly what I think we could predict at this point in the cycle, which is you've shale oil companies that are cutting their spending on drilling but they're increasing their production by shifting to either more efficient methods of production or shifting to more productive areas and letting the marginal ones go.

A great example is Continental Resources, which, basically, recently told Wall Street that it's going to cut its drilling budget by $600 million for 2015 and, yet, it's going to increase production by 29%. You've got lost more production coming out of the shale regions, no signs that anybody in OPEC is going to cut production, you've got a lot of OPEC countries that have problems cutting production, which is that, if they cut production, they would bring in less money. Even though they would be selling for a lower price, they would rather do that because they need the revenue to keep their government budgets going, etc.

So, cosmic chicken, the next big event in this game is OPEC meeting on the 29th of November. We'll see whether anybody cuts anything. The Saudis, so far, have been playing a game that basically is about market share and trying to shift oil around the world to places that need it more given that US grades are displacing, since the US doesn't really export, but it's displacing lighter grades from places like Nigeria, which still leaves a lot of demand for the sour and heavier oil coming out of Saudi Arabia, so it's not at all clear how this is all going to break down but, right now, there's no sense of anybody I can see that anybody is going to cut supply and that means that lower oil prices are with us for a while yet.

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