Nobody can deny the resurgence of interest commodities have found this year with two of the standout cases being Gold and Oil. Both have underperformed in prior years but oil has managed to steal the attention of most market participants who were entertained and amused by the price wars initiated by OPEC on US shale gas producers.
Only last week we heard a presumptuous tone being struck by none other than de facto OPEC leader Saudi Arabia in a bid to smooth over cracks that have appeared prominently in recent months as a result of its autocratic manner in directing the collusive oil body over the last two years.
Riyadh's victory at all cost approach and one track mind focused on nothing besides destroying its US competitors has meant a number of OPEC members being inflicted with catastrophic economic circumstances that's produced shock into the system and weakened their abilities far beyond conventional means of repair.
Needless to say the vulnerability OPEC nations are experiencing is fully understood and felt by US shale gas producers who've received a similar barrage of doubt over their valuations and ability to pay down debt piles that have been accumulating. This kind of negative sentiment around US producers has afforded Saudi Arabia the chance of reinforcing the belief to its colleagues that it was right in its methods of eliminating competition of which it took full advantage of during the bi-annual OPEC summit held in Vienna last week.
Digging deeper into the mechanics and events that led to oil prices almost doubling since the lows of January tells a different story though.
Indeed US shale gas producers were forced to turn off or temporarily close wells due to incurring losses and low prospects of witnessing long term stability in prices however the remaining producers who had survived holding off creditors knocking at the front door have done so because of their quickness to adapt to the situation better than their soured counterparts.
This has meant looking for alternate uses for shale gas apart from converting it into oil-based products for the motor industry that too went through its own crisis by almost reaching full storage capacity. Again this came down to producers attempting to hold out for as long as possible in anticipation of a price rise in oil that didn't materialise until now.
Those producers who opted to produce liquefied natural gas (otherwise abbreviated LNG) haven't yielded the desired outcome they'd expect but they did alleviate the supply pressure on oil production globally by shifting its product into a new market.
The result???
A bounce in overall oil prices and a fresh supply glut formed in LNG markets who've been suffering the same fate as most commodity prices; battered, bruised and unloved. Given the pronounced resurgence in the commodity sector it suggests that this particular market might have to endure the troubles of a downturn a little while longer unless a way is found to clear the glut in place.
Considering oil prices have doubled in six months, the possibilities of increasing margins by opting out of producing LNG and reverting back into oil are too tempting for US shale gas producers to ignore. Added that LNG closely tracks along the prices of oil yet in present times a divergence has developed by a far enough margin to push US producers to reconsider their end product, I wouldn't be surprised to see US production starting to grow once again.
This will result in pressure being applied to the oil price once again that'll contain the impressive rally we've witnessed so far and perhaps blow out the ember of hope many oil bulls may have had in believing that the current surge in prices characterizes an element of sustainability.
Short term product flexibility is the competitive advantage of US producers and I can't see why they wouldn't take control of that leaving Saudi Arabia with a fresh dilemma to deal with in proving that the assertion they made in implying their policies fixed the stability of oil prices rests on rickety foundations.
