OPEC’s decision this week to cede no ground to rival producers underscored the price war in the crude market and the challenge to U.S. 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. Thursday’s decision in Vienna propelled futures to the lowest since 2010, a level that means some shale projects may lose money.
“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 in New York.
“It’s huge,” he said. “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 U.S. output to the highest in three decades, contributing to a global surplus that Venezuela on Thursday 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 U.S. supply expands, eroding its share of the global market to the lowest in more than a quarter century, according to the group’s own estimates.
Many energy experts had expected the group of oil producing countries to act to halt a free fall in the price of crude oil since this summer. Instead, OPEC announced that it would not cut production in hopes of hurting producers in the U.S. and elsewhere that have been flooding the market with crude and natural gas.
A barrel of benchmark U.S. crude, which cost well above $100 as recently as June, had fallen to about $73 as of this week. The effect was immediate.
Crude oil slumped $7.54, or 10 percent, to settle at $66.15, a level not seen since September 2009, when the U.S. was sliding into its worst economic crisis since the Great Depression.
The pain being felt by energy producers is proving to be a big gain for consumers and businesses that are heavily reliant on energy.
Cheap energy has already been cited for lifting the spirits on Main Street as people spend less at the pump and put more goodies into their shopping bags.
Also riding high are the airlines, package delivery services and cruise lines, which are spending less on fuel.
“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.”
Since the early 2000s, surging demand 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, Lee said.
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,” said Richard Mallinson, an oil analyst at London-based Energy Aspects Ltd. “That doesn’t mean they won’t do it in the next few months if prices stay low.”