The OPEC’s 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 organisation of petroleum exporting countries 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. The other 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 SA 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 the other day 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.
Benchmark Brent crude fell the most in more than three years after OPEC’s decision sliding 6.7 per cent to close at $72.58 a barrel. Futures for January settlement rose to $72.80 a barrel at 11:53 am in London close to the lowest since July 2010. Prices peaked this year at $115.71 in June.
“We will produce 30 million barrels a day for the next six 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 any body, we just try to have a fair price.”
The OPEC pumped 30.97 million 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. The OPEC’s own analysts estimate production was 30.25 million last month, according to a report. The members will abide by the 30 million barrel-a-day target, El-Badri said the other day.
“The 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 by phone. “It wouldn’t be surprising if Brent starts testing $70.”
Conventional oil producers in the OPEC could 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 the 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.”
The OPEC may now be prepared to let prices fall to force some drillers with higher production costs to stop pumping, said Julian Lee, an oil strategist who writes for Bloomberg First Word and has worked in the industry for 25 years. That scenario would mark the start of a fourth oil-market era since the end of the 1970s, he said.
