Xi heads to Saudi Arabia amid oil price volatility

China’s President Xi Jinping is set to travel to Saudi Arabia this week, one of the world’s biggest oil suppliers. A trip to Iran is also on the cards, a country that is a potential new source of oil for China, the world’s second largest consumer. The visits come as the price of oil is in steep decline.

“It’s really just a combination of supply and demand factors. On the demand side, from China, we just see much lower demand for oil than was expected. At the same time, the U.S. and Europe are getting more efficient. And that’s basically run head into increasing supply in the Middle East. We’re now looking at Iran being fully open with all the sanctions being lifted, and it's just the perfect storm for oil prices,” said Professor Joseph Foudy, NY University Stern School of Business.

One other factor that has had a big impact on oil prices here Wall Street and around the world came into play late last year. That is when the U.S. Congress voted to end a ban on oil exports that had been in place since 1975. That meant U.S. crude producers could sell onto the already saturated international market.

“We see increasing production from fracking in the United States. So it’s possible we see a rebound in oil prices, but 10-15 years out, I just see structural factors that are going to be pushing the demand for oil down,” Foudy said.

And prices will continue falling as long as there is an oil glut. But the nation with the world’s largest oil reserves, Saudi Arabia, has been refusing to cut production, putting some African and Latin American producers in an economic vise.

“Saudi Arabia produces about a third of the total OPEC production, and they are the ones that hold flexibility in their ability to produce, and they are really the only country that's been willing to cut back voluntarily on production in the past. So the key decision-maker is Saudi Arabia. Only if they make a decision will any change happen,” said Spencer Welch, Director of Oil Market Team, IHS Global Insight.

That decision does not seem forthcoming for now, meaning OPEC members are bitterly divided at a time of unprecedented challenges and change.

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