Oil: A game of chicken or headless chickens?

A pump jack and pipes at an oil field near Bakersfield, California.
Lucy Nicholson | Reuters
A pump jack and pipes at an oil field near Bakersfield, California.

Forget quantitative easing and low base rates, the REAL great global stimulus—tumbling prices in commodities and, most importantly, oil— continues and it's hard to see what's going to change any time soon.

This huge transfer of wealth from commodity producers to consumers has shown little sign of abating despite a brief spring rally off the lows, which are once again being challenged in products from copper to iron.

In oil, the signs of the glut in supply are everywhere. Even in deepest, darkest Sussex prices are tumbling. I can now fill up the car with diesel at below £1.10 ($1.70) a liter and all the talk from the supermarkets is of a battle down to a pound. In addition, us poor souls who live on heating oil rather than gas are at last having a field day. Latest prices are down to just 30 pence a liter. My most expensive purchase of the last four years has been north of 70 pence a liter. Happy Days!

But surely the old adage that low prices are the cure for low prices will soon come to the fore and float prices aggressively in the not too distant future?

Well in the normal course of events that would be the case, with billions of dollars of production coming off the table in response to low prices. And to a certain extent that is happening in North America and elsewhere. Yet this time, the great global game of chicken means there is a huge reluctance to be the one to cut production and lose market share.

But is it really a game of chicken or in reality a bunch of headless chickens running around, unsure how to react, thereby resulting in no response or action? Saudi Arabia and its allies on the Organisation of Petroleum Exporting Countries (OPEC) are painted as being at war with the U.S. and others who have upset the oil production applecart, staring down the interloper until it cracks.

The problem is Saudi Arabia and OPEC have such enormous budgetary pressures that they daren't cut first as non-OPEC producers from Russia and elsewhere would gladly leap in to markets they vacate.

It's not much better in the U.S. Yes, the cost of shale production has now fallen from very high to only moderately high but the price falls haven't actually led to oil wells being shut. In fact, finances are so bad that many smaller U.S. operators are now producing even more oil in spite of the falling price in order to have greater dollar sales and satiate the banks who have lent them so much money.

Vote to see results
Total Votes:

Not a Scientific Survey. Results may not total 100% due to rounding.

Yes, there has been a demand response at low commodity prices but nowhere near enough to offset the current over-production. Look at US car sales. They are surging to circa 17 million units on an annualised basis and, yes, Americans are driving more miles with these shiny new automobiles. But they aren't necessarily using more fuel. You see, the average age of a car in the US now is 11.5 years old. The new purchases are on a different stratosphere in terms of fuel efficiency.

My only real concern though on creating a bear case scenario for oil though is that it's becoming a consensus view and that worries me. The last time so many people had such conviction on oil was when we were north of $100 per barrel. That call was for prices to rally slowly until the end of the decade. So much for safety in numbers.

Steve Sedgwick is CNBC's OPEC correspondent and co-anchor of Squawk Box Europe. Follow him on @steve_sedgwick .