Despite Recent Upshots, Oil Prices Will Remain Subdued Global Risk Insights- May 28, 2015, 9:33 AM EDT SHARE ON: Despite recent gains, oil prices will remain subdued as the oil glut continues to dominate global markets. Increases in US and OPEC oil production will play a big part in the months to come. Regardless of recent upshots in oil prices, the million-dollar question remains in which direction the oil prices will go in the future. The volatility in oil prices has continued to disturb world markets since last November’s OPEC decision to keep its production rates at 30 million barrels per day (bpd). This triggered the price war between the traditional oil exporters led by Saudi Arabia and the unconventional North American shale producers. Behind OPEC’s November move was an obvious attempt by Saudi Arabia to preserve its global market share (which had already been in decline due to lower-than-expected demand from China) and a major decrease in US oil imports since the beginning of the American shale revolution. The impact on US producers is fierce. The number of rigs in the US has dropped by 60% since last November, and 22 companies, with $33 billion of assets, have filed for bankruptcy protection, warned of insolvency, or deferred interest payments on bonds. Since January, the Brent benchmark rebounded to around $65 per barrel. However, it is unlikely that prices will move upwards much further because the fundamentals haven’t changed much. The world is still oversupplied with oil, and there are no obvious signs that this trend will reverse in the near future. The worst case scenario, according to the investment bank Goldman Sachs, is that oil prices will drop to as low as $45 per barrel in the next three months. US oil production continues to rise, and according to the EIA, it will not go down much from today’s levels despite the negative market outlook. In addition, a recent hike in prices, supported by large reductions in production costs and the FED’s loose monetary policy, will only help to restart some of the US production. Likewise, Saudi Arabia increased its production by an additional 700,000 bpd in the past six months, along with other producers such as Libya, Iraq, and non-OPEC exporters. Should the nuclear negotiations with Iran succeed, the country is expected to start exporting at least 500,000 bpd in a matter of months, thus adding to the glut. In spite of this, few signs signal the reversal of Saudi tactics at the next OPEC meeting in June. The Kingdom continues to increase its crude oil production, but is also developing additional refining capacities where the margins are much higher compared to crude oil exports. In the past two years, the Saudis have put two new refineries in operation, and are planning to build a third one by 2017, with a total capacity of 1,200,000 bpd. In terms of geopolitics, the greatest irony is the fact that neither the US nor Saudi Arabia will be the greatest victims of the oil price war. In general, the US economy benefits from lower energy prices, and refineries in the US energy sector stand to gain in particular. Likewise, Saudi Arabia and other Gulf states, with their large foreign currency reserves and low production costs, are well suited to sustain longer periods of low oil prices and adapt their economies to new market circumstances. On the other hand, oil exporters with weaker economies and lower foreign currency reserves will suffer. The UK Overseas Development Institute calculated that a 30% fall in oil prices will shave $63 billion from sub-Saharan Africa economies, which account for 5% of the region’s GDP. Accordingly, the IMF predicts that low oil prices will take 4% out of producers’ GDP, with Venezuela, Iraq, and Russia being particularly exposed due to their political and economic vulnerabilities.