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OPEC Decision Creates New World of Oil
Energy

OPEC Decision Creates New World of Oil

OPEC’s decision to cede no ground to rival producers underscored the price war in the crude market and the challenge to US shale drillers.
The 12-nation Organization of Petroleum Exporting Countries kept its output target unchanged even after the steepest slump in oil prices since the global recession, prompting speculation it has abandoned its role as a swing producer. Friday’s decision in Vienna propelled futures to the lowest since 2010, a level that means some shale projects may lose money, Fuel Fix reported.
“We are entering a new era for oil prices, where the market itself will manage supply, no longer Saudi Arabia and OPEC,” said Mike Wittner, the head of oil research at Societe Generale SA in New York. “It’s huge. This is a signal that they’re throwing in the towel. The markets have changed for many years to come.”
The fracking boom has driven US output to the highest in three decades, contributing to a global surplus that Venezuela estimated at 2 million barrels a day, more than the production of five OPEC members. Demand for the group’s crude will fall every year until 2017 as US supply expands, eroding its share of the global market to the lowest in more than a quarter century, according to the OPEC’s own estimates.
Benchmark Brent crude fell the most in more than three years after OPEC’s decision, sliding 6.7 percent to close at $72.58 a barrel. Futures for January settlement rose to $70.15 a barrel on Saturday, close to the lowest since July 2010. Prices peaked this year at $115.71 in June.

  Market Signals
“We will produce 30 million barrels a day for the next 6 months, and we will watch to see how the market behaves,” OPEC Secretary-General Abdalla El-Badri told reporters in Vienna after the meeting. “We are not sending any signals to anybody, we just try to have a fair price.”
OPEC pumped 30.97 million barrels a day in October and has exceeded its current output ceiling in all but four of the 34 months since it was implemented, according to data compiled by Bloomberg. OPEC’s own analysts estimate production was 30.25 million last month, according to a report Nov. 12. Members will abide by the 30 million barrel-a-day target, El-Badri said.
“OPEC has chosen to abdicate its role as a swing producer, leaving it to the market to decide what the oil price should be,” Harry Tchilinguirian, head of commodity markets at BNP Paribas SA in London, said yesterday by phone. “It wouldn’t be surprising if Brent starts testing $70.”

  Fourth Era
Since the early 2000s, surging demand growth drove up prices allowing companies to apply new extraction techniques and develop deep-water and other costly oil. That ended an era that pervaded since the mid 1980s, which was characterized by low prices and OPEC regaining the market share that it had previously sacrificed in an attempt to preserve high prices.
OPEC will face pressure too, with prices now below the level needed by nine member states to balance their budgets, according to data compiled by Bloomberg.
“They haven’t taken collective action,” Richard Mallinson, an oil analyst at London-based Energy Aspects Ltd., said. “That doesn’t mean they won’t do it in the next few months if prices stay low.”
Venezuela’s oil income has fallen by 35 percent, President Nicolas Maduro said on state television Nov. 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, Finance Minister Ngozi Okonjo-Iweala said Nov. 16.

  US Production Rising
US oil production has risen to 9.077 million barrels a day, the highest level in weekly data from the Energy Information Administration going back to 1983. Output will climb to 9.4 million next year, the most since 1972, it forecasts.
Middle Eastern exporters including Saudi Arabia, Iran and Iraq can break even at about $30 a barrel, while some US producers need more than $80, Sanford C. Bernstein & Co. said in a report last month.
OPEC’s policy will spur a crash in the US shale industry, Leonid Fedun, a vice president and board member at OAO Lukoil, Russia’s second-largest oil producer, said in an interview in London before the group’s decision.
“In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,” said Fedun. “The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”
The share prices of US oil producers including Exxon Mobil Corp., Chevron Corp. and Schlumberger Ltd. fell by at least 4 percent in early New York trading Friday.

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