Tags: shale | OPEC | oil | Coy

Businessweek: American Shale Producers Are 'Breaking OPEC's Neck'

By    |   Friday, 12 December 2014 10:53 AM

Forget high production quotas as the reason why OPEC is teetering — it's the relentless production of shale oil in North America that is breaking the cartel's neck, according to Businessweek's Peter Coy and Matthew Philips

In fact, they noted, the energy environment today is similar to one in 1931, when a torrent of oil production by wildcatters in the U.S. drove prices down to a nickel a barrel — cheaper than a bowl of chili in those days.

Today shale producers are similarly flooding the market with a glut of millions of barrels of new oil daily. Oil fell below $60 a barrel last week for the first time in five years.

"All [OPEC members] can do is gape at the falling price of crude and contemplate the destruction of their cartel at the hands of the Americans, whom they thought they had supplanted for good 40 years ago," Coy and Philips explained.

The pair noted there is no shortage of theories as to why OPEC did not trim production quotas at its November meeting to support higher prices. Some theories involve a decision by dominant OPEC player Saudi Arabia to punish Iran, which has higher production costs, or a hope by Saudi Arabia that if prices fall enough, U.S. shale production might dry up.

Whatever the reason, there is little indication when the price pressure may lift. Some observers believe OPEC blundered. "If my calculations are correct, this will go down as one of the worst commodity trading decisions ever," Wilbur Ross, billionaire investor and chairman of WL Ross, wrote in an email to Coy and Philips.

But they believe there may be little OPEC could do at this point to buttress oil prices.

"In fact, prices are being forced down not by any action (or inaction) of the Saudis but by the American shale producers, who are simply producing all the oil they can to maximize their profits," they wrote.

"Singly the shale busters are nothing. Collectively, their breakneck production is breaking OPEC's neck. This is the remorseless, leaderless free market at work.

The International Energy Agency (IEA) is warning about the possibility of unrest in some oil producer nations if prices continue at current levels.

In its December Oil Market Report, the IEA cut its production outlook for 2015 another notch based on weakening demand growth.

The IEA worried that a glut in supplies in developed nations could "bump against storage capacity limits."

"The resulting downward price pressure would raise the risk of social instability or financial difficulties if producers found it difficult to pay back debt," the agency report said.

"Continued price declines would for some countries and companies make an already difficult situation even worse."

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Forget high production quotas as the reason why OPEC is teetering — it's the relentless production of shale oil in North America that is breaking the cartel's neck, according to Businessweek's Peter Coy and Matthew Philips.
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2014-53-12
Friday, 12 December 2014 10:53 AM
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