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Andy Tully

Andy Tully

Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com

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OPEC Fires First Shot In Global Oil Price War

OPEC’s decision not to cut production to shore up oil prices drove down the price of oil even further in a strong challenge to American shale oil producers – or, in less delicate language, the start of an all-or-nothing price war.

The immediate result of OPEC’s decision was a further drop in the price of the world’s leading benchmark oil, Brent crude, which lost $6.50 per barrel, falling to $71.25 on Nov. 27, its worst performance in a single day since 2011. Brent soon had a weak rally, raising its value to $72.55.

The price of oil has now dropped by nearly 40 percent since mid-June.

But expect Brent and other crudes to fall again, says Igor Sechin, the CEO of Russia’s government-owned oil company Rosneft. He said the average price of oil could go below $60 per barrel during the first two quarters of 2015.

Related: The 2014 Oil Price Crash Explained

OPEC’s big decision was not to lower its total production cap of 30 million barrels a day, turning aside pleas from less-affluent cartel members, who said the current oil glut has left them unable to afford to sell their oil at such oil prices. They had urged OPEC to reduce production by 1 million barrels per day.

Abdullah Bin Hamad al-Attiyah, who served as Qatar’s oil minister for nearly 20 years, countered on Nov. 19 that any decision to reduce production should be shouldered by major producers who aren’t in OPEC. “Russia, Norway and Mexico must all come to the table,” he said. He may just as well have included the United States.

All these non-OPEC producers recently have been harvesting oil at record or near-record levels contributing to the global oil glut that couldn’t be remedied by a simple OPEC production cut of 1 million barrels per day.

American energy companies lately have been enjoying a production boom by extracting oil and gas locked in underground shale formations. To get at the oil, though, they must resort to the new technologies of hydraulic fracturing and horizontal drilling. These methods are costly, and most observers say they’re unsustainable if the price of oil fell to or below $60 per barrel.

Related: OPEC Refuses To Cut Production, Sending Oil Price Down Again

Jamie Webster, an oil analyst at the consultancy IHS Energy, told the Financial Times that OPEC’s decision was “a very aggressive test for US shale. It’s a new gambit for OPEC to try.” But the test is just as aggressive for other producers, particularly those relying on other expensive extraction techniques necessary for Brazil’s deepwater wells, Canada’s oil sands and Arctic offshore oil.

But US oil companies may be the most vulnerable, according to Leonid Fedun, a board member at Russia’s Lukoil. He told Bloomberg News that even at the current price of slightly over $70 per barrel, smaller companies involved shale extraction are beginning to feel the financial pinch.

As oil prices continue to fall, Fedun predicted, so will the smaller companies. “The [US] shale boom is on a par with the dot-com boom,” he said. “The strong players will remain, the weak ones will vanish.”

By Andy Tully of Oilprice.com

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  • R. L. Hails Sr. P. E. (ret.) on December 02 2014 said:
    This is not war; it is old fashioned free competition involving a new technology, fracking. The result, lower prices and instability. Those whose entire lives were spent on the sweet side of a monopoly are feeling the cold wind of an uncertain income. Their city sized mansions are now unsustainable but the poor masses will have access to energy.

    Jim Cramer says oil can be profitable at the mid $40/b range, due to dropping costs, improvements in fracking. True, those who leveraged on the basis of $100/b will die, as will the speculators who were eternally long on rising oil prices. Those experts who did not forecast this happening a year ago, also may have a damp crouch, when talking to their clients.

    What we are experiencing is an industrial revival, from a long recession. Prior down turns were powered back by consumer spending; this is an old fashioned job creating industry building, lower cost of production, resurgence. Two dollar gas may be permanent. This is breaking rice bowls in the green community, and elsewhere. So be it.
  • Nader Habibi on December 06 2014 said:
    The cost structure of US oil production does not support R.L. Hail's argument. Almost 2.5 million b/d of US output in high cost and it also has low reserves. As prices fall below $70 per barrel, this production will become unprofitable and will decline sharply. As a result the global supply will decline and push the price back to above $80 per barrel after several high cost US producers leave the market.
  • Jack Everett on December 06 2014 said:
    Most consumers that comment on oil and gas are only thinking about the price of gasoline.
    The price of heating oil is still rising either because the refineries will not pass on the savings to consumers or the demand for heating fuels is in peak demand in winter months.
    Natural gas that is supposed to be the biggest resource in America is also on the rise. Where I live gas for cooking and heating has just taken another jump in price. Diesel fuel remains in my state an average of $3.59 a gallon.

    If AZmerica has all this natural gas as it claims why is the cost going up and why are a stead stream of convoy LNG tankers moving all this gas to Europe just to spite Russia?

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