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Opec move puts US shale in tight spot
[NEW YORK] 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.
But 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 an American 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," said Phil Flynn, senior market analyst at the Price Futures Group.
"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." US oil prices tumbled more than US$7 (S$9.12) 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 (-4.5 per cent) and Chevron (-5.5 per cent). Also falling were oil services companies like Halliburton (-10.9 per cent) and Nabors Industries (-12.9 per cent), as well as shale producers Continental Resources (-19.9 per cent) and EOG Resources (-7.8 per cent).
Despite the carnage, US oil industry officials brushed off suggestions the American shale boom will die.
"It's certainly a test, but it's certainly not an exit," said Fred Lawrence, a vice president at the Independent Petroleum Association of America.
The Opec move comes amid a multi-year US energy boom that has transformed America's energy picture and the global petroleum market as a whole.
The United States has lifted daily oil production by more than 40 per cent 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 countries and pressured prices at a time when global economic growth is slowing.
Faced with a roughly 35 per cent drop in oil prices since June, the Organization of the Petroleum Exporting Countries 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 "stabilise itself eventually." The manuever 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 2015, 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." Barclays headlined the note, "Over to you, America." A note from Morgan Stanley similarly warned the oil market could be entering a "new paradigm" and predicted the move would immediately curtail US and global energy investment.
Mr Lawrence of IPAA 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 200-300 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.
Mr Lawrence said some higher-cost drilling will likely be curtailed in key shale regions like the Bakken in North Dakota and the Tuscaloosa Trend in Louisiana.
But in other cases, such as the Permian Basin, many leading independents have stronger finances than is widely thought. Also, many US companies rely on revenues from production of natural gas, whose prices are not directly influenced by Opec's action. And companies are bringing down production costs with improved technology, Lawrence said.
Mr Lawrence said Opec's move would affect less-efficient US companies, but would not derail the industry as a whole.
"It'll be a challenge that'll make our producers stronger," he said.