Depending upon which side of the fence one sits, major oil supply disruptions are typically considered bad luck, but in Opec’s case, recent supply disruptions have helped balance the market and support prices.
“OPEC has been lucky – 3.5 million bpd of shale production has been absorbed through disruptions. They’re running out of luck,” – Gary Ross, CEO of PIRA Energy Group as reported by Reuters
Oil market crystal balls are working overtime trying to find a floor to the current precipitous oil price decline that has seen both benchmark Brent and WTI dip below $90 per barrel. Most analysts agree that at the macro level weak demand – and weak European and Asian economic indicators – coupled with ample supply are pushing down prices.
And while those or similar oil market dynamics have coincided to influence prices countless times over past decades, Opec’s reaction to the current situation has been of particular interest. The cartel appears to be the most fractured it’s been in recent memory, with the Saudis unilaterally cutting prices to Asia in a bid to secure market share.
Some, including PIRA’s Ross, doubt Opec can cut production enough to exert significant upward price pressure over the short term. And oil prices would likely need to fall well below $80/bbl for an extended period before US producers laid down rigs en masse, according to RBN Energy’s Sandy Fielden.
“However, in the short term we are unlikely to see a significant drop in crude production here in the U.S. – even if crude prices fall some way below $80/Bbl. That’s because there are plenty of shale plays with attractive rates of return at crude prices well below $80/Bbl and new drilling is more likely to migrate to areas with better rates of return than to come to a halt,” Fielden wrote in a recent blog post.
If oil prices continue declining through next month, some action from Opec will be expected, even if it’s just a symbolic production cut. And unless global crude prices change course and surge back above $100/bbl, the producer group’s November 27 meeting is likely to be one of their more closely scrutinized conclaves.
