From May OPEC will cut oil production by 1.15 million barrels per day. While this might not have a huge effect on the global economy it does open up the possibility for a black swan event. 

OPEC has made two rounds of cuts in the past 6 months to the amount of oil they supply; they do this to prop up prices. Saudi Arabia can pump oil for as little as $5 per barrel, so selling it at around $80 a barrel is hugely profitable for them. However this forces the supply and demand equation on oil and the U.S believe inflation is intentionally kept high. This is why OPEC, in particular, is regarded explicitly as a cartel. And like with other kinds of Cartels there is often talk of breaking it, but no real action behind the rhetoric. 

What this makes clear is that U.S power is waning; because Saudi Arabia would not cut production now if they feared serious repercussions.

 

Is a Black Swan Event Unlikely?

Well, the U.S looks increasingly like a diminished figure on the global stage. It simply doesn’t have the leverage it once had. So if middle east tensions escalate there is very little it can do to deter conflict andl economic disaster. However this was not always the case, in the 1970’s when Iran was trying to run its own oil cartel and increase prices, it was Saudi Arabia that increased production to break the strike. As a result the Shah fell and the U.S got its way. Cut to today, and it seems unlikely that the U.S still has the heft to engineer a similar outcome.

 

What could trigger a black swan event? 

OPEC accounts for about 40% of global production, so an attack on a Saudi refinery by Iran, for example, would have a huge impact. In the past this kind of attack could be dismissed because there was plenty of supply, but now the consequences could spell real danger. It is not necessarily in the interests of OPEC to prevent the U.S from sliding into recession. Furthermore rising political unrest in Iran itself could also result in some supply shocks. 



Why Hasn’t the Price of Oil Gone Up?

The average forecast this year for oil is around $87 a barrel which is not as crazy as one might think. There are several theories behind this. One is that there is so much debt looming over the economy and a fear of recession that we simply won’t need that much oil, people tend to drive less during a downturn. Another reason is that despite all the sanctions Russian oil still made it to market, mitigating a supply shock. Russia was still able to sell to India and China fairly cheaply. However American reserves are down so there is still the potential of price shocks and a black swan event for oil.

At Rixtrema we can help prepare your portfolio for black swan events and any number of risk scenarios. So give us a call today and book a free demo. 

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