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Tags: OPEC | oil | energy | market

OPEC Inaction Spurs Survival of Fittest as Oil Tumbles Below $65

Monday, 01 December 2014 07:15 AM EST

West Texas Intermediate tumbled below $65 a barrel to the lowest level since July 2009 amid speculation prices have further to drop before OPEC’s decision to maintain output slows U.S. shale supply.

Benchmark futures in New York and London slumped more than three percent after capping their biggest monthly loss in about six years as the Organization of Petroleum Exporting Countries signaled the group will leave it to the market to reduce a global glut. Current prices are no guarantee of a significant decline in U.S. shale output, Iran’s Oil Minister Bijan Namdar Zanganeh said in an interview on Nov. 28.

Oil has collapsed into a bear market as the U.S. pumps crude at the fastest rate in three decades while global demand growth slows. OPEC last week resisted calls from members including Venezuela, Iran and Iraq to reduce its production target of 30 million barrels a day at a meeting in Vienna.

“It’s clear that a production war is on and it will be survival of the fittest,” Phil Flynn, a senior market analyst at the Price Futures Group in Chicago, said by e-mail today. WTI “will see a test of $60 soon,” he said.

WTI for January delivery fell as much as 3.1 percent, or $2.05, to $64.10 a barrel in electronic trading on the New York Mercantile Exchange. The volume of all futures traded was more than five times the 100-day average. Prices, which decreased 18 percent in November, are down 35 percent this year.

Cut Considered

Brent for January settlement dropped as much as 3.3 percent, or $2.33 a barrel, to $67.82 on the ICE Futures Europe exchange, the lowest intraday price since October 2009. The contract slid $2.43 to $70.15 on Nov. 28. Prices declined 18 percent last month and are 39 percent lower in 2014.

Most of OPEC’s 12 members intended to trim 1.5 million barrels, or 5 percent, from their collective quota, with non- member producers contributing an additional 500,000 barrels in reductions, according to Zanganeh’s account of the group’s meeting in the Austrian capital. Saudi Arabian Oil Minister Ali Al-Naimi cited the threat from U.S. shale as the main justification for maintaining the output limit, Zanganeh said.

“It’s likely that this pressure will remain on prices until there are signs of some shutdowns,” Michael McCarthy, a chief strategist at CMC Markets in Sydney, said by phone today. OPEC’s decision not to cut output is “aimed at shaking out high-cost producers, particularly shale,” he said.

Shale Boom

The U.S. oil boom has been driven by a combination of horizontal drilling and hydraulic fracturing, which has unlocked supplies from shale formations including the Bakken in North Dakota and the Eagle Ford in Texas. The technique is typically more expensive than pumping from conventional reservoirs.

Only about 4 percent of U.S. shale output needs $80 a barrel or more to be profitable, according to the International Energy Agency. Most production in the Bakken formation, one of the main drivers of shale oil output, remains commercially viable at or below $42, the Paris-based agency estimates. It expects U.S. supply to rise by almost 1 million barrels a day next year, with increasing flows to international markets.

OPEC, which supplies about 40 percent of the world’s oil, exceeded its official target for a sixth straight month in November, even after reducing output. The group pumped 30.56 million barrels a day, 424,000 barrels a day less than in October, a Bloomberg News survey of oil companies, producers and analysts showed.

Budget Deficit

Crude’s slump has roiled markets from Nigeria’s naira to Venezuelan bonds and the Russian ruble as it threatens the revenue of producing countries. Prices have dropped below the level needed by at least nine OPEC member states to balance their budgets, according to data compiled by Bloomberg.

Iraq, OPEC’s second-biggest producer, formed a panel to look into ways to cut next year’s proposed budget deficit to a “realistic level,” according to a cabinet statement released over the weekend. The current spending draft is based on oil prices at $70 a barrel, Obaid Mahal, a government official, said by phone yesterday.

Russia will cope with the price tumble and doesn’t see “anything so extraordinary in what is happening,” President Vladimir Putin said on Nov. 28. The world’s second-largest oil exporter, which relies on crude for almost half its income, is revising down estimates after basing next year’s budget on oil at $100 a barrel, Economy Minister Alexei Ulyukayev told reporters in Moscow the same day.

Opportunistic Buying

“It’s essentially being left up to demand and supply fundamentals, which could mean it’s going to take a while before the market is ultimately more balanced,” Daniel Hynes, a senior commodity strategist at Australia and New Zealand Banking Group in Sydney, said by phone. “We’ve seen the emergence of some opportunistic buying by the Chinese. If that’s ongoing, that could be supportive.”

China’s efforts to boost emergency stockpiles may boost its imports by as much as 700,000 barrels a day in 2015, according to Energy Aspects Ltd., a London-based consultant. That’s more than half the global glut forecast by Citigroup Inc.

U.S. production expanded to 9.08 million barrels a day through Nov. 21, the most in weekly records that started in January 1983, data from the Energy Information Administration show. Crude inventories climbed to 383 million, according to the Energy Department’s statistical arm.

© Copyright 2023 Bloomberg News. All rights reserved.

West Texas Intermediate tumbled below $65 a barrel to the lowest level since July 2009 amid speculation prices have further to drop before OPEC's decision to maintain output slows U.S. shale supply.
OPEC, oil, energy, market
Monday, 01 December 2014 07:15 AM
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