OPEC’s secretary general has a dim view of American shale’s ability to keep booming in today’s bearish oil market. The WSJ reports:
OPEC’s top official said Sunday that the cartel’s decision to continue pumping crude in the face of collapsing prices is hurting the U.S. shale-oil industry and that a global pullback on investment could lead to a shortage that will push the market upward again. […]“When OPEC didn’t reduce its production, everything collapsed for the U.S. shale-oil-rig market,” [OPEC’s secretary general Abdalla Salem el-Badri] said.
This is as clear an explanation of OPEC’s recent do-nothing strategy as you’ll find. El-Badri further defended the cartel’s decision not to cut production, saying “if we made a cut in the November meeting, then we would have needed to make another cut in January, and then we would need another cut in June as supply will keep increasing from non-OPEC.”OPEC, led by Saudi Arabia, is keeping output high and continuing to contribute to an oversupplied crude market in an attempt to squeeze out higher-cost producers, especially those upstarts successfully plumbing American shale. It is counting on U.S. shale producers to pack up shop in this low-price period, but in doing so, it is also effectively betting against the industry’s ability to find new ways to operate on smaller margins. And that might not be the safest bet to make.True, American oil growth forecasts are being ratcheted down, but already we’re seeing shale breakeven prices—the price a producer requires to make a profit—decrease as well. Some drillers are preparing a “fracklog” of drilled but not yet operational wells, waiting for an uptick in oil price before they start hydraulically fracturing the underground rock to get the crude flowing. Such preparations could stymie any potential price rebound, since these wells will be tapped whenever the price ticks upwards.That could throw another wrinkle in OPEC’s plan, because while the Saudis may have enough of a cushion to weather these low prices, many of their fellow petrostates are much worse off. The longer this cheap crude market persists, the louder the calls for cutting production will get within OPEC. Meanwhile, U.S. producers will be hard at work refining their methods.