Basically there are a couple of theories and I’m personally guessing its a combination of the two. Just keep in mind back in July of 2008, oil was at $147 a barrel. By December of 2008 it was down to around $32 per barrel…a drop of over -75%. In other words, prices may still have further to tumble.
Increased Production and Less Demand – Chinese demand has somewhat slowed, while U.S. oil supplies have risen from five million barrels per day to around 9.3 million barrels per day in the past five years. Also keep in mind we are using more bio-fuels and vehicles are getting much better gas milage. You also have to recognize the Saudis have brought more rigs online.
Geopolitical Maneuvering – The Saudis are making their move for political reasons. They clearly want to send a message to Russia as they fear the implications of a well funded Iran and ISIS [the Islamic State] military movement. Bottom-line, this is a very viable way to break Iran’s economy. the theory is that Saudi Arabia has nearly $750 billion in reserves and can withstand low oil prices for several months, perhaps even a year or more. My point is, the Saudis clearly have a game plan and they will want to see their goals achieved before they change or shift their policy. The next OPEC meeting is in June and I highly doubt the Saudi’s veer from their current positioning.