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Energy Insights: Energy News: Oil plunges as Opec tests the mettle of US shale industry

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Oil plunges as Opec tests the mettle of US shale industry



Ali al-Naimi, Saudi oil minister, at the Opec meeting this week


Ali al-Naimi, Saudi oil minister, at the Opec meeting this week

Opec threw down the gauntlet to US shale oil producers by deciding not to cut its production, in a move that sent the oil price tumbling by more than 8 per cent to a four-year low.

The cartel said it was leaving its output ceiling of 30m barrels a day unchanged, in a significant departure from its traditional policy of cutting production to prop up falling oil prices.

Any further fall in the price of crude, which has dropped by nearly 40 per cent since mid-June, will mean more pain for oil exporting countries and global energy companies, and could endanger billions of dollars of investment in new oil projects.

After Thursday’s decision was announced, ICE January Brent, the international oil benchmark, fell by $6.50 a barrel to $71.25, its steepest one-day fall since 2011. It later pared its losses to trade at $72.55.

Many in the industry believe crude has much further to fall. Igor Sechin, the powerful head of Russia’s state oil group Rosneft, predicted on Thursday that it could drop below $60 in the first half of next year.

Surging US production, which is at its highest in more than three decades, has combined with Opec supplies that are well ahead of target and a slowdown in oil demand in China and Europe to create an increasing glut.

Before Thursday’s meeting, some had expected Opec to pare back production in a bid to push prices higher, much as it did in December 2008 when it sliced 2.2m barrels per day of output, the deepest cut in its history.

But by resisting calls for a cut, Saudi Arabia, Opec’s largest producer and effective leader, appeared to be hunkering down for a long period of low prices, hoping that would squeeze US shale operators and drive out the highest-cost producers.

“I wouldn’t call it a price war, but it’s a very aggressive test for US shale,” said Jamie Webster, oil analyst at IHS Energy, a consultancy. “It’s a new gambit for Opec to try.”

However, lower prices will hurt other producers too, such as those trying to extract oil from the offshore Arctic, Canadian oil sands and deepwater wells in Brazil.

They are also a test for several of Opec’s poorer members. Venezuela, Nigeria and Iran need higher prices to balance their budgets, unlike the low-cost producers with large foreign exchange reserves, such as Saudi Arabia, that can withstand a long period of cheap crude.

Amrita Sen, oil analyst at Energy Aspects said: “This is becoming a battle of [who has] the deep pockets and survival of the fittest.”

In its final communiqué, Opec said it would maintain its current output levels in the interest of “restoring market equilibrium”, in a clear indication it believes the cure for the growing oversupply is a lower oil price.

That message echoed earlier comments by Ali al-Naimi, the Saudi oil minister, who said ahead of the meeting that he expected the oil market “to stabilise itself eventually”.

Share prices in some of the world’s largest energy companies and oil services groups tumbled after the Opec decision. Royal Dutch Shell fell 4.3 per cent, BP 2.7 per cent and Total 4.1 per cent. Shares in SeaDrill, the drilling rig company, sank 7 per cent.

Thursday’s Opec decision kept in place the 30m b/d output target that the cartel established three years ago. However, it has regularly breached the target. Indeed, output has been above this threshold for the past six months.

Although some analysts had thought the cartel may surprise observers with an output cut, others argued that driving prices higher would only encourage US shale drillers and other high-cost producers. All the while, Opec would only continue to lose market share, they said.

I wouldn’t call it a price war, but it’s a very aggressive test for US shale. It’s a new gambit for Opec to try

- Jamie Webster, IHS Energy

“Those producers that have been hardest hit by the oil price drop have been persuaded [ . . .] that the only way to counter the surge in US shale oil production is to allow lower prices to pare back supply over time,” said Bill Farren-Price, head of Petroleum Policy Intelligence.

Speaking after the meeting, Diezani Alison-Madueke, Nigeria’s oil minister, said the decision to roll over the output target was seen as “the best thing to do at this time, with the hopes that over the next few months we may see stability in oil prices.”

Referring to the backdrop of weak oil demand, she said: “It’s a toss of the coin as to whether, if we had cut anything at this point in time, we would have seen higher prices.”

Additonal reporting by Christopher Adams, Jack Farchy, Elaine Moore and Emiko Terazono

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