The crude crash was arguably the biggest story of 2014 (and now the start of 2015) in part because it caught almost everybody by surprise. Almost. In early January 2014, Ian Bremmer, president of Eurasia group, told Yahoo Finance that oil could "crater" in 2014 and OPEC could "fall apart." He was right -- even if he now admits the depth of the decline caught him by surprise.
Oil prices slumped further Monday, hitting the lowest level since April 2009. Prices were down sharply again early Tuesday before seeming to stabilze after OPEC maintained it will not cut production to curb the slide.
Bremmer’s call last year had a lot to do with the fact that the geopolitics were “overpriced,” he tells Yahoo Finance Editor-in-Chief Aaron Task in the attached video. “People said that the Middle East was falling apart and that was going to lead to a lot of oil coming off the market,” says Bremmer. “We agreed the Middle East was coming apart but it wasn’t going to affect oil production.”
Bremmer says the misunderstanding of energy and the politicial landscape has now come out of the market and prices dropped dramatically as a result.
Bremmer predicted oil could fall to $80 a barrel last January. Both Brent and WTI are now trading below $50 a barrel, as oversupply continues to drive down prices. But that could change as 2015 unfolds. Libya’s production is falling off as the country is “falling apart,” Bremmer says.
Then there's the question of if or when the Saudis are going to pull back production. “I have a hard time seeing the Saudis going through 2015 without [any cuts] on the production side, “ Bremmer says, pointing to the Saudi's budget concerns and the country’s growing population. Also, he notes they have a lot of commitments to places like Egypt and Jordan and Lebanon that "really need Saudi money."
But the Saudi government isn't showing its cards. Saudi Prince Alwaleed said over the weekend that we’ll never see $100 a barrel oil again. "There's less demand, and there's oversupply. And both are recipes for a crash in oil. And that's what happened. It's a no-brainer,” he told USA Today.
Alwaleed's words echo Saudi oil minister Ali al-Naimi who made similar comments in December. But Bremmer thinks this may just be strategy to scare some of the higher price producers and it doesn’t mean the Saudis truly believe oil will never hit $100 again. “It certainly doesn’t mean to me that they’re not going to touch production over the coming year,” he says.
Production in the world today is no longer coming from mainly from OPEC nations, and Bremmer says, the Saudis understand that “OPEC does not have relevance.” The U.S. is now the world’s top oil producer followed by Saudi Arabia and Russia, according to the Energy Information Administration. In the third quarter of 2014, the United States produced 14.2 million barrels of oil each day while Saudi Arabia produced 11.7 million per day. Russia produced 10.5 million per day. Meanwhile, most of the OPEC countries are massively constrained in terms of capital and in terms of what they can actually produce. “It’s a race to the bottom,” says Bremmer.
Venezuela Leads 'Race to the Bottom'
While oil producers remain under a tremendous amount of economic pressure, Bremmer doesn’t think the petrostates are going to dramatically change policies. “The Gulf states can manage this, the Iranians can even manage this. It’s not going to force them to go to a deal.”
What about Russia? Economic sanctions along with plunging oil prices have crippled the Russian economy. But “the Russians absolutely can manage this," Bremmer says. Russian "consumers are going to get hit and inflation in Russia is absolutely coming but popularity for Putin remains through the roof."
In the end, this all means "they are going to continue to demonize the West, they are going to continue to play hardball on Ukraine," Bremmer predicts.
Venezuela remains the big question mark. With oil prices plummeting, the Venezuelan economy has been destroyed. Venezuelans face shortages of basic goods which has forced shoppers across the country to line up in front of stores for hours and take to the streets in protest. What’s more, the OPEC nation will face several deadlines for billions of dollars in foreign debt this year.
“If oil prices stay down where they are today, I think there is a meaningful chance that Venezuela is going to default,” says Bremmer. Venezuelan President Nicolas Maduro has been on a tour of Russia, China and the Middle East pleading for help. China last week promised a commitment of a $20 billion investment in Venezuela. Maduro is asking fellow OPEC member for help as well. “Who else is going to support them?” asks Bremmer. “This is a tiny economy and China can buy themselves not only goodwill but great commercial terms on an awful lot in Venezuela because they are the only ones willing to float them right now.”
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