Oil seen entering new era as Opec won’t yield to US shale
Updated about an hour ago
TEHRAN: The Organisation of Petroleum Exporting Countries (Opec) decision to cede no ground to rival producers underscored the price war in the crude market and the challenge to US shale drillers.
The 12-nation Opec kept its output target unchanged even after the steepest slump in oil prices since the global recession, prompting speculation it has abandoned its role as a swing producer. Thursday’s decision in Vienna propelled futures to the lowest since 2010, a level that means some shale projects may lose money.
“We are entering a new era for oil prices, where the market itself will manage supply, no longer Saudi Arabia and Opec,” said Mike Wittner, the head of oil research at Societe Generale in New York. “It’s huge. This is a signal that they’re throwing in the towel. The markets have changed for many years to come.”
The fracking boom has driven US output to the highest in three decades, contributing to a global surplus that Venezuela Thursday estimated at 2 million barrels a day, more than the production of five Opec members.
Demand for the group’s crude will fall every year until 2017 as US supply expands, eroding its share of the global market to the lowest in more than a quarter century, according to the group’s own estimates.
“We will produce 30m barrels a day for the next 6 months, and we will watch to see how the market behaves,” Opec Secretary-General Abdalla El-Badri told reporters in Vienna after the meeting. “We are not sending any signals to anybody, we just try to have a fair price.”
Opec pumped 30.97m barrels a day in October and has exceeded its current output ceiling in all but four of the 34 months since it was implemented, according to data compiled by Bloomberg. Opec’s own analysts estimate production was 30.25m last month, according to a report Nov. 12. Members will abide by the 30m barrel-a-day target, El-Badri said on Thursday.
“Opec has chosen to abdicate its role as a swing producer, leaving it to the market to decide what the oil price should be,” Harry Tchilinguirian, head of commodity markets at BNP Paribas SA in London, said Thursday by phone. “It wouldn’t be surprising if Brent starts testing $70.”
Conventional oil producers in Opec can no longer dictate prices, United Arab Emirates Energy Minister Suhail Al-Mazrouei said in an interview in Vienna on Nov. 26. Newcomers to the market who have the highest costs and created the glut should be the ones to determine the price, he said.
“That is what Opec is hoping for,” Carsten Fritsch, a commodity analyst at Commerzbank AG in Frankfurt, said in an e- mail. “It’s the question of who will blink first.”
Since the early 2000s, surging demand growth drove up prices allowing companies to apply new extraction techniques and develop deep-water and other costly oil. That ended an era that pervaded since the mid 1980s, which was characterised by low prices and Opec regaining the market share that it had previously sacrificed in an attempt to preserve high prices, Lee said.
Opec will face pressure too, with prices now below the level needed by nine member states to balance their budgets, according to data compiled by Bloomberg.
“They haven’t taken collective action,” Richard Mallinson, an oil analyst at London-based Energy Aspects Ltd., said by phone. “That doesn’t mean they won’t do it in the next few months if prices stay low.”
US oil production has risen to 9.077m barrels a day, the highest level in weekly data from the Energy Information Administration going back to 1983. Output will climb to 9.4m next year, the most since 1972, it forecasts.
Middle Eastern exporters including Saudi Arabia, Iran and Iraq can break even at about $30 a barrel, while some US producers need more than $80, Sanford C. Bernstein & Co. said in a report last month.
“In 2016, when Opec completes this objective of cleaning up the American marginal market, the oil price will start growing again,” said Fedun. “The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”
Igor Sechin, the chief executive officer of OAO Rosneft, Russia’s largest oil producer, said after a meeting with Venezuela, Saudi Arabia and Mexico that his nation wouldn’t need to cut output even if prices fell below $60.
“The question is, what price level will be low enough to slow US production growth?” Torbjoern Kjus, an analyst at DNB ASA, Norway’s biggest bank, said by phone. “What price will get US growth to slow to 500,000 barrels a day from this year’s rate of 1.4m barrels?”
Opec has gone “cold turkey” on balancing the oil market, Goldman Sachs said in a report Thursday. Prices may have further to fall until there is evidence of US production slowing, according to the bank. It said last month that oil markets were entering a “new oil order,” with Opec retreating from its role as a swing producer.
By arrangement with Washington Post-Bloomberg News Service
Published in Dawn, November 30th, 2014
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