OPEC Fires First Shot in Global Oil Price War
OPEC’s decision not to cut production to shore up oil prices drove down the price of oil even further in a strong challenge to American shale oil producers – or, in less delicate language, the start of an all-or-nothing price war.
The immediate result of OPEC’s decision was a further drop in the price of the world’s leading benchmark oil, Brent crude, which lost $6.50 per barrel, falling to $71.25 on November 27, its worst performance in a single day since 2011. Brent soon had a weak rally, raising its value to $72.55.
The price of oil has now dropped by nearly 40% since mid-June.
But expect Brent and other crudes to fall again, says Igor Sechin, the CEO of Russia’s government-owned oil company Rosneft. He said the average price of oil could go below $60 per barrel during the first two quarters of 2015.
OPEC’s big decision was not to lower its total production cap of 30 million barrels a day, turning aside pleas from less-affluent cartel members, who said the current oil glut has left them unable to afford to sell their oil at such prices. They had urged OPEC to reduce production by 1 million barrels per day.
Abdullah Bin Hamad al-Attiyah, who served as Qatar’s oil minister for nearly 20 years, countered on November 19 that any decision to reduce production should be shouldered by major producers who aren’t in OPEC. “Russia, Norway and Mexico must all come to the table,” he said. He may just as well have included the United States.
All these non-OPEC producers recently have been harvesting oil at record or near-record levels contributing to the global oil glut that couldn’t be remedied by a simple OPEC production cut of 1 million barrels per day.
American energy companies lately have been enjoying a production boom by extracting oil and gas locked in underground shale formations. To get at the oil, though, they must resort to the new technologies of hydraulic fracturing and horizontal drilling. These methods are costly, and most observers say they’re unsustainable if the price of oil fell to or below $60 per barrel.
Jamie Webster, an oil analyst at the consultancy IHS Energy, told the Financial Times that OPEC’s decision was “a very aggressive test for U.S. shale. It’s a new gambit for OPEC to try.” But the test is just as aggressive for other producers, particularly those relying on other expensive extraction techniques necessary for Brazil’s deepwater wells, Canada’s oil sands, and Arctic offshore oil.
But U.S. oil companies may be the most vulnerable, according to Leonid Fedun, a board member at Russia’s Lukoil. He told Bloomberg News that even at the current price of slightly over $70 per barrel, smaller companies involved in shale extraction are beginning to feel the financial pinch.
As oil prices continue to fall, Fedun predicted, so will the smaller companies. “The [U.S.] shale boom is on a par with the dot-com boom,” he said. “The strong players will remain, the weak ones will vanish.”
Originally written for OilPrice.com, a website that focuses on news and analysis on the topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.