Precise looks at the future of the oil market after the OPEC meeting comes to a close.
It was the meeting that said, “No.” Last week OPEC refused to cut output, declined to set a target price and rejected the idea of an output ceiling. It’s like the entire group watched the 1983 movie War Games on Wednesday night before the meeting and decided the computer generated personality Joshua had it right. “A strange game. The only winning move is not to play.” The result? Well, the price of crude sunk to US $65 a barrel this week and the ruble dropped to a record low of 50 to the dollar. And where’s it going to? As Forbes says, “Who the hell knows?”
It would appear that an almighty game of chicken is going on with the world’s oil kings. The United Arab Emirates’ Energy Minister Suhail Al-Mazrouei said as much the day before OPEC met, “Newcomers to the market who have the highest costs and created the glut should be the ones to determine the price.”
Leonid Fedun from Russia’s Lukoil says OPEC is trying to create a perfect storm for US shale drillers. In basic terms maintain the current glut of supply which will lead to even lower prices and in turn unproductive shale drilling. Fedun said, “ In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again. The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”
However for those conditions to arise, it will require an even steeper fall in prices than we’ve already seen – a 40% drop since June. According to the International Energy Agency the vast majority of US shale drillers can remain in the black until the price falls to below US$42 a barrel – only about 4% require US$80 or more.
Can OPEC stomach what it will take to realise this perfect storm? Futures markets have been predicting low prices until at least 2017. Some can of course take the hit – Saudi Arabia and Kuwait. But for Iran, Brazil and Venezuela it’s a different story. Iran, which is still feeling the effects of Western sanctions, needs higher prices and it feels Saudi is trying to ruin it. The worst hit is Venezuela which already seems likely to be forced to default on its debts. According to Bloomberg last week, Citgo – Venezuelan’s US refining and marketing operation – was ordered to sell assets and send the dollars quietly back home. And of course there is Russia – although not an OPEC-member, the country is generally considered a friend of the cartel – which is reeling from sanctions following its involvement in Ukraine. President Putin forecast tales of world economic collapse if prices linger beneath US$80 for a prolonged period of time. Fears of recession in the country are unlikely to materialise however as it has invested in substantial foreign reserves it could dip into if needed.
The energy analyst Michael Levi says wait and see. It’s “premature to declare that sort of new era now. OPEC countries would be sticking to past behavior if they failed to cut production now but stepped in in a few weeks or months.”
It’s worth noting that the oil market is an unpredictable beast. Back in May most experts were confidently predicting prices would remain above a hundred dollars a barrel forever. A study from Bernstein Research suggested that prices would rise from a hundred and thirteen dollars in 2015 to a hundred and fifty-eight in 2020.
And that’s not to say it won’t happen. A continued drop in oil prices could lead to a boost in development. That would then lead to an increase in demand for oil. Which would then..you’ve got it, lead to higher prices.
Now, wouldn’t you prefer a nice game of chess?.