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Is OPEC Losing Its Power? US Oil Frackers Flex Production Muscles

There was a time when OPEC set the rules in the oil market and exercised its power to cut production and reverse a slide in oil prices.

Then came fracking — a technology, which allowed oil to be extracted from places it could never have been imagined before.

Some of these places were in the US, which turned America into yet a bigger oil supplier.

Financial Product Six Month Price Change
iPath S&P GSCI Crude Oil (NYSE:OIL) -22.60%
Energy Select SPDR Fund (NYSE:XLE) -16.07
Market Vector Oil Services (NYSE:OIH) -16

Fracking and the larger oil supplies changed the rules of the game in the oil market. US producers could now turn the table on OPEC. The larger oil supply pushed oil prices lower, especially as big oil consuming countries like China slowed down.

But OPEC didn’t blink. It went on an all out war against US oil producers. The cartel keep on pumping oil, as prices collapsed — from $100 a year and half ago to the low $40s recently.

The theory behind this strategy is simple. In an-all out price war only the fittest suppliers, the ones with a low cost and deep pockets, will survive. Then the supply of oil will come down, and oil prices will once again soar.

OPEC’s strategy seems to be working. Yesterday, the cartel declared victory, citing a scale back in US oil supplies, while its nation members continued to pump oil into the world markets.

Still, OPEC’s clout isn’t what it used to be. And declaring victory is premature, in our opinion, especially if the global economy continues to be soft.

In this “game of the chicken,” OPEC members are the bigger players, and therefore the ones who stand to lose the most if the price war continues. Besides, US producers may be scaling back output, but they aren’t out of the market.

While OPEC is winning the game this far, it may wind up being the side that blinks in the end.
Source: Forbes

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