Global oil production is set to fall sharply

On Wednesday, the cartel announced that it will slash daily oil production by 2.46 million barrels a day. That’s OPEC’s biggest production cut ever.
What’s even more extraordinary is that some of the big the non-OPEC producers are now coordinating their production cuts with the cartel.

The Russians attended the OPEC meeting and they may cut announce their own cuts shortly. Tiny oil-rich Azerbaijan was there too. And they announced a production cut of 300,000 barrels a day.

In fact, since September, OPEC has announced that it will cut daily oil production by a whopping 4.2 million barrels a day.

How jobless Saudis will force an oil price hike

Cuts of that size ought to have been enough to send the oil price soaring. Instead it has fallen.

There’s a good reason for that. OPEC has cried wolf too often in the past. The cartel has a habit of announcing production cuts to drive the price up and then not fully sticking to them. Individual members end up cheating by pumping more oil to profit from higher prices. So you can see why the market is sceptical about the latest announcement.

The latest cuts are meant to start in January. And markets are waiting to see whether OPEC actually sticks to the new quotas.

That actually opens up a unique opportunity for investors. Because this time things really are different.

The OPEC oil barons simply can’t afford lower oil prices. To balance their budgets, some of the biggest oil exporters need oil prices far higher than where they are now. Russia needs it at $70 per barrel, Iran needs it at $90 and Venezuela needs it to go to $100 per barrel.

But what’s really changed this time is that Saudi Arabia is driving the oil cuts. Saudi is the biggest oil exporter in the world. And until now, they have dragged their feet over cutting production. But things have changed quickly.

In November, Saudi’s King Abdullah announced that the Kingdom needed the price of oil at $75 per barrel. At less than that, their economy won’t grow fast enough to provide jobs for its growing population. And the last thing the Saudi Royal Family needs is a growing population of jobless, disenfranchised young men in the Kingdom.

The low oil prices we are seeing now threatens the position of the House of Saud. And they are going to do everything they can to rectify that.

So if the latest round of production cuts doesn’t drive the price of oil back up, you can bet that they will cut production again.

The falling dollar will send the price of oil soaring

And then there is the US dollar. The weak dollar was a massive factor in the record oil prices that we saw this year. Because a falling dollar will boost the price of oil. Like most internationally-traded commodities, oil is priced in dollars. So, when the dollar weakens, prices rise to compensate for it.

On Tuesday, the US Federal Reserve slashed interest rates to just 0% to 0.25%. That doesn’t give them room for any more major interest rate cuts. Instead, they will simply print money to fund the bailout of the US financial system.

At the same time, Barack Obama plans to spend more than $850 billion on a stimulus package to revive the US economy…

That flood of new money entering the financial system should drive the value of the dollar down sharply over the next 12 – 24 months. In fact it has already fallen by 10.5% since late October…

That’s brilliant news for the oil exporters. Because as the dollar continues to weaken, the price of oil is set to take-off again.

So whatever the short-term movement in the price of oil, you can bet that it is set for a massive rally over the medium-term. We have been predicting a strong rebound in the price of oil. And the conditions for it are now rapidly coming into place.