The price of oil has continued its downward move despite an agreement between the OPEC and participating N-OPEC producers to extend the current supply cut agreement that aims to reduce global oil supply by 1.76 million barrels per day. While weaker oil price broke another myth or fundamental understanding that a nine-month agreement between the OPEC and N-OPEC countries would immediately boost oil price, it has broken many such myths over the past years and understanding them or at least recognizing them is of utmost importance if one looks to forecast the future price. Let’s look at some fundamental understanding that was broken,

• First, it was assumed that with the sharp drop in oil price back in 2015, there would be a sharp decline in production from countries like the United States, where it was estimated that the cost of producing shale oil is as high as $80-90 per barrel. However, that understanding got broken as the production in the United States recovered by almost 0.9 million barrels per day even as the oil price continued to hover below $50 per barrel.
• Another understanding was that if oil price declines too rapidly, the traditional swing producer would come and cut production. That didn’t happen too. Then Saudi oil minister Ali Al-Naimi rejected cutting production. Saudi Arabia came to the rescue along with other not until last November.
• Another understanding was that Saudi Arabia would have to act decisively as it can’t survive lower oil price with a large budget deficit. However, in reality, despite the large budget deficit, Saudi Arabia is able to survive longer than anticipated using its FX reserve.
• Another understanding was that there would be a very sharp correction in supply-demand fundamentals if oil price declines below $60 per barrel and price would begin a decisive recovery. That again has not happened and lower for longer seems to be the case now. WTI is currently trading at 446.9 per barrel and Brent at $2.2 per barrel premium.