In taking no action on production on Thursday, OPEC did the opposite of what it usually does. It effectively rubber-stamped a supply glut that already has sent prices plunging.
However, to many analysts, the cartel’s seeming enthusiasm for lower crude oil prices was not really all that surprising. Rather, the tactic made sense in light of a US shale boom that has put OPEC on the defensive.
“OPEC is all in and will continue to flood the globe with oil in an effort to bury the US shale oil producer,” Price Futures Group senior market analyst Phil Flynn said.
“It is an all-out production war and it is game on, all the barrels are on the table and for OPEC it is life or death,” he said.
US oil prices tumbled more than US$7 on Friday, sinking to US$66.15 a barrel, the lowest level since September 2009, following an OPEC meeting that one research firm called a “watershed” moment.
Equity investors also pummeled the sector, hitting giants like ExxonMobil Corp (minus-4.5 percent) and Chevron Corp (minus-5.5 percent).
Also falling were oil services companies like Halliburton Co (minus-10.9 percent) and Nabors Industries Inc (minus-12.9 percent), as well as shale producers Continental Resources Inc (minus-19.9 percent) and EOG Resources Inc (minus-7.8 percent).
Despite the carnage, US oil industry officials brushed off suggestions the US shale boom will die.
“It’s certainly a test, but it’s certainly not an exit,” Independent Petroleum Association of America (IPAA) vice president Fred Lawrence said.
“US oil producers can handle more pain than OPEC imagines,” he added.
The US has lifted daily oil production by more than 40 percent since 2006, igniting a debate about allowing US oil exports and rendering the US a worthy competitor to petroleum kingpins Saudi Arabia and Russia as the world’s biggest petroleum producer.
In the oil market, the increased supplies from the US has offset the effects of political strife in leading oil-producing nations and pressured prices at a time when global economic growth is slowing.
Faced with a roughly 35 percent drop in oil prices since June, OPEC on Thursday could have cut its 30 million barrels per day production ceiling or at least promised to stop overproducing.
Instead, the cartel effectively stood pat as powerful members like Saudi Oil Minister Ali al-Naimi talked of how he expected the oil market to “stabilize itself eventually.”
The maneuver appeared to be another example of a producer orchestrating “good sweating,” a tactic employed since the days of Rockefeller in the late 19th century to flood the market to pressure less efficient competitors.
Thursday’s OPEC decision was “a watershed for the oil market,” Barclays analysts said in a research note that predicted oil inventories would continue to swell through the fourth quarter and into next year, owing to a 1.49 million barrels per day increase in non-OPEC supply next year.
“OPEC is clearly signaling that it will no longer bear the burden of market adjustment alone and this decision puts the onus on other producers, especially US tight oil to adjust as well,” the statement said.
Barclays headlined the note, “Over to you, America.”
A note from Morgan Stanley sldimilarly warned the oil market could be entering a “new paradigm” and predicted the move would immediately curtail US and global energy investment.
Lawrence agreed that US producers would cut back in light of the changed outlook. He predicted the US rig count for oil projects could fall about 200 to 300 from 1,572 in the coming weeks.
“A lot of companies are going to be adjusting their capex [capital expenditures] programs over the next two weeks,” he said.
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