The decision by the Organization of the Petroleum Exporting Countries (OPEC) to maintain its production ceiling at 30 million barrels per day pushes US shale oil producers closer to the edge with the risk of forcing them to produce at a loss.
OPEC’s decision to maintain its output is seen by the vast majority of analysts as the organization’s way to drive prices down in order to clean out the excess of production, especially in the American market.
Already in the last century, when American oil giant Rockefeller and his Standard Oil dominated the market, this tactic of lowering prices to eliminate competitors already existed. Following this strategy, OPEC will continue to flood the world with its oil in hopes of burying the production of shale oil in the US which threatens the market share of the organization. It is a declaration of war on production and OPEC is fighting for its own relevance, or even existence.
And this maneuver seems to work: A barrel of light sweet crude (WTI) for delivery in January fell 7.54 dollars on the New York Mercantile Exchange (Nymex) on Friday to settle at 66.15 dollars, its lowest level since September 2009. In London, the barrel of Brent crude fell below the symbolic $70 for the first time in four and a half years, down to 69.78 dollars on the Intercontinental Exchange (ICE) before closing at 70.15 dollars.
The oil sector, including some major US companies like Halliburton and Schlumberger, suffered a rout on Friday in the stock market.
Halliburton (HAL) closed Friday at 42.20 dollars a share, down 10.86% from the previous day. Schlumberger (SLB), for its part, lost 7.30% of its value to close at 85.95 dollars a share.
OPEC’s decision, taken Thursday at a meeting in Vienna, comes amid the growing production of oil and shale gas in the US which imposes a new order to the world market.
Since 2006, production in the United States has increased by 40%. US production now exceeds 9 million barrels per day, putting the country in direct competition with Saudi Arabia and Russia for the title of the world’s largest producer of hydrocarbons.
Faced with a drop of nearly 40% of oil prices since June, OPEC could decide to cut production ceiling to promote an increase in the prices. But instead, the organization decided to maintain the current level of production, under pressure notably from Saudi Arabia, which aims, in the words of its oil minister Ali al-Nuaimi, for a possible stabilization of the market.
In this new context, US producers will have to lower their production and new projects could fall to 200/300 instead of some 1,500 currently planned. Many companies will adjust their operating expenses in the next two weeks.
The most expensive drilling will be shelved in shale production regions like the Bakken Oil Fields in North Dakota and the Tuscaloosa Trend in Louisiana.
But in other cases, such as the Permian Basin in Texas and New Mexico, independent producers have stronger financial resources than generally admitted. Many of them also earn their living from the production of natural gas, which is not affected by the decisions of OPEC. Production costs are also falling due to technological progress.
While OPEC’s target seems to be the US oil production sector, some other big players in the market will be greatly affected, including some of OPEC’s members. Some producing countries such as Russia and Venezuela will experience difficult times. Friday, the ruble continued its long slump, falling to new lows against the euro and the dollar. Oil prices below 60 dollars could spell disaster for Russia which is already overwhelmed by Western sanctions and capital flight caused by the crisis Ukrainian.
Venezuela, one of OPEC’s members, will suffer even more. Venezuela’s finances are a mess; fears of a default is regularly put forward by some analysts. By Friday evening, moreover, President Madura ordered budget cuts following the decision of OPEC. The day before, Foreign Minister Rafael Ramirez assured that their budget was “built with a barrel at $60,” adding, “We are ready to deal with it.” Many analysts, nonetheless, remain sceptic about Venezuela’s ability to cope with lower oil prices.
It’s unclear who will the war on oil prices. If oil prices continue to fall, some American companies will suffer but for other countries who depend on the production of oil to support their budget, the whole economy will suffer. However, despite the uncertainty, one thing is clear: for now, the real winner is the consumer who is paying significantly less at the pump.