The benchmark for American crude, called the West Texas Intermediate (WTI), fell below $80 per barrel for the first time in more than two years in trading today before staging a small rally. Similarly, Brent crude, Europe’s benchmark, traded below $83 per barrel, a four-year low, before seeing a slight rebound on what Reuters explains to be “technical buying ahead of options expiry for U.S. crude oil and contract expiry for Brent crude.”But temporary rebound notwithstanding, there’s no denying that this is a bear market for crude oil. Brent prices have dropped by more than 28 percent since June, while WTI has tumbled nearly 25 percent in that same time period. Weak demand has collided with an oversupplied market, partly due to Libyan supplies coming back online after protracted disruptions, and, of course, in part due to booming supplies out of the suddenly shale-rich America.The question on everyone’s minds is, where is OPEC? The cartel of petrostates has colluded in the past to cut production to keep prices artificially high, yet the organization’s largest producer and, historically, the one most likely to take the lead on these cuts—Saudi Arabia—has cut prices, not production, in recent weeks.The Saudis have actually offered discounts to customers, especially in Asia, in a bid to gain market share in the midst of this price rout. Kuwait wasted little time in following suit, and, somewhat surprisingly, Iran even joined in, saying it could live with lower oil prices. With the exception of Iran, the countries seemingly most content with declining prices are also the ones with relatively low breakeven prices—that is, the price at which these petrostates need to sell their oil in order to balance their budgets.Venezuela, a country teetering on the brink of default, needs to sell its black gold at $121 per barrel just to stay in the black. Caracas has been outspoken about its calls for an emergency meeting of the cartel, too impatient to wait for OPEC’s already scheduled meeting in late November. Those calls have fallen on deaf ears, and, as the WSJ reports, many analysts think OPEC won’t choose to cut production when it meets next month:
Continued opposition by Saudi Arabia, Kuwait and the U.A.E., however, now makes any cut highly unlikely. Gulf nations worry any reduction in the limit on OPEC production would lead to them losing share in global oil markets, the people familiar with the matter said, even if that means oil prices keep dropping.“Saudi Arabia and the rest of the Gulf countries have no intention whatsoever to accept the idea of a cut at the November meeting,” one Gulf OPEC official said. “If we are going to end up with lower market share and prices will fall anyway, let’s stick to market share.”
There has been some speculation that the Saudis may be looking to abdicate their role as OPEC’s (and therefore the world’s) de facto swing supplier, banking on the fact that U.S. shale producers, the new kids on the block, will soon have to cut production because fracking will cease to be profitable. America’s unconventional oil drilling tends to be more expensive; the IEA recently announced that at $80 per barrel, 96 percent of shale drilling would still be profitable, but if WTI prices were to dip much lower, the shale boom would hit a considerable hurdle.We’re not there yet, and in fact the price of oil today exists in a kind of sweet spot: high enough to continue to incentivize U.S. fracking, but low enough to benefit American consumers (average gas prices in the U.S. are at their lowest level since 2011) and stymie some of America’s geopolitical opponents. Russia, for example, needs oil to trade above $100 per barrel to balance its budget.The Saudi strategy isn’t unlike a game of chicken. The Saudi breakeven price hovers around $93 per barrel, and while it can afford to operate in the red to gain market share for now, it may not be able to do so in the long term. Banking on American shale production cuts may be a bigger gamble than the Saudis expect, too: it will take some time for the market to shift and fracking to draw down, even if prices continue to plunge.And U.S. shale has a final trump card: innovation. Though fracked wells have steep decline rates, drillers continue to optimize rigs and maximize output while minimizing costs. Bloomberg reports that shale firms have driven costs down by as much as $30 per barrel since 2012, and one analyst surmised that “[t]he profit margin on most commercial unconventional oil plays will support prices as low as $50, many below that even.”It’s difficult to predict what happens next, but for now, the United States seems to be sitting pretty while many of the world’s petrostates—including a number of America’s geopolitical adversaries—are feeling the pinch. We’ll be watching.