Saudi Arabia and its OPEC allies’ firm stand against cutting crude output to slow the plunge in oil prices has set the energy world on a painful course that will leave the weakest behind, from governments to the US wildcatters.
A grand experiment has begun, one in which the cartel of producing nations – sometimes called the central bank of oil – is leaving the market to decide who is strongest and how to cut as much as 2 million barrels a day of surplus supply.
Oil patch executives including billionaire Harold Hamm have vowed to drill on, asserting they can profit well below $70 a barrel, with output unlikely to fall for at least a year.
Marginal producers in less profitable US shale areas, as well as countries from Iran to Russia and operations from Canada to Norway will see the knife sooner, according to analyses by Wells Fargo & Co., IHS Inc. and ITG Investment Research.
“We’re in a very nerve-wracking environment right now and will be for probably the next couple of years,” Jamie Webster, senior director for global crude markets at IHS, said. “This is a different game. This isn’t just about additional barrels, this is about barrels that are going to keep coming and keep coming.”
Investors punished oil producers, as Hamm’s Continental Resources Inc. fell 20 percent, the most in six years, amid a swift plunge in crude to below $70 for the first time since 2010.
Exxon Mobil Corp. declined 4.2 percent to close at $90.54 in New York. Talisman Energy Inc., based in Calgary, was down 2.7 percent Friday in Toronto after dropping 14 percent the day before.
A production cut by the 12-member Organisation of Petroleum Exporting Countries would have been the quickest way to tighten the world’s oil supplies and boost prices. In the US, output is expected either to remain flat or rise by almost 1 million barrels a day next year, according to the Paris-based International Energy Agency and ITG.
That’s because only about 4 percent of shale production needs $80 or more to be profitable. Most drilling in the Bakken formation, one of the main drivers of shale oil output, returns cash at or below $42 a barrel, the IEA estimates.
ITG estimates it will take six months before lower prices slow production growth from U.S. shale, which is responsible for propelling the country’s production to the highest in more than three decades.
Elsewhere, oil markets already have begun to pressure governments that rely on higher prices to finance their budgets, fuel subsidies to citizens and expand drilling.
Venezuela’s oil income has fallen by 35 percent, President Nicolas Maduro said on state television November 19.
Nigeria increased interest rates for the first time in three years on Nov. 26 and devalued its currency. The government is planning to cut spending by 6 percent next year, Ngozi Okonjo-Iweala, finance minister, said November 16. Both Nigeria and Venezuela are part of OPEC.
Several countries within OPEC such as Iran, Iraq, Nigeria and Venezuela, as well as non-OPEC states such as Russia and Norway, will probably have to cut production with lower oil prices in 2015 and beyond, Roger Read, an analyst at Wells Fargo, said Friday in a note to investors.
