How Oil Price Spike Over Saudi 'Corruption Purge' May Increase US Output

How Oil Price Spike Over Saudi 'Corruption Purge' May Increase US Output

Goldman Sachs also warned of greater price volatility ahead, citing rising tensions in the Middle East, especially between OPEC members Saudi Arabia and Iran, along with soaring U.S. oil production.

The number of rigs drilling for oil in the US rose by nine this week to 738, Baker Hughes said.

If the cartel wants to target a higher price (which it won't officially communicate to the market), it will likely trigger a new wave of U.S. shale production next year.

The U.S. Energy Information Administration (EIA) said in a report that U.S. crude production rose to 9.620 million barrels per day during the week of Nov. 3, the highest weekly output on record according to federal energy data going back to 1983.

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Saudi Arabia has arrested 11 princes and 38 sitting and former ministers and deputy ministers over corruption charges. Unease grew, after a rocket was fired from Yemen towards Saudi Arabia. "Indeed, even though the spot price has jumped, longer-dated futures are lower than they were last week, reflecting concerns that higher prices now will encourage more supply in the future", Capital Economics, a UK-based economic research consultancy, believes. It's thought the Saudi crown Prince will support keeping the cap in place, as higher oil prices are required for his economic plans. This is the source of market risk. The Monday surge was driven by news of a political purge by the Saudi crown prince, exacerbated by rising tensions elsewhere.

"Market participants expect OPEC to extend the production cuts beyond March 2018 and stocks to decline further", analysts at Commerzbank said, noting, however, that "the higher price level should lead to a further rise in U.S. shale oil production". The potential further increase in oil price, buoyed by the situation in Saudi Arabia, may influence the upcoming negotiations but is unlikely to tank the deal. Economists had expected the index to dip to 100.0.

Overall, I think prices are currently approaching the higher end of the trading range for the rest of the year, and will be looking for a mean reversion towards or below $60 in the weeks to come.

Riyadh has been one of the driving forces behind the 2016 agreement, intended to overcome the global oil glut.