After a brief rebound, crude prices are once again falling to new depths as the U.S. benchmark hit its lowest level in six years this week. The New York Times reports:
The direction of oil prices, which had risen sharply from January lows, has fallen back in recent days. Traders are now focused on the second quarter of the year, when demand for oil is traditionally weak because of the end of winter and scheduled refinery shutdowns for maintenance.On Monday, the price of West Texas Intermediate crude, the main United States benchmark, fell about 2 percent to about $44 a barrel, a six-year low, while Brent crude, the international benchmark, fell by about 2 percent to about $53 a barrel.
The market is currently oversupplied as countries like Libya and Iraq somehow still manage to contribute to the market while American shale producers, the new kids on the block, are keeping the crude flowing despite rapidly shrinking margins. Combine that with weak demand in Asia and Europe and it’s no wonder that we haven’t found a floor in this bear market quite yet.The biggest surprise in these last eight months hasn’t been the speed of the price plunge but rather OPEC’s decision not to do anything about it. In the past the cartel, led by its largest producer Saudi Arabia, has opted to cut production to stop price slides, but Riyadh has changed its tactics this time around. Worried for their market share in the face of the U.S. energy boom (and undoubtedly eager to twist the knife in their regional rival Iran), the Saudis have led OPEC into a policy of inaction, content for the time being to deal with the short-term budget deficits these low prices are bringing in the hopes of pushing back at American frackers.This is in a sense an abdication of OPEC’s role as the world’s swing producer, and in some ways U.S. shale operators seem well-suited to assume that mantle—shale wells can be started and stopped relatively quickly and, because they’re relatively high-cost, are more sensitive to the ups and downs of the global market. But perhaps absent in the Saudi calculations was the shale industry’s ability to cut costs and boost output per dollar spent. American innovation may mean these bargain prices are here to stay, or at least around for longer than OPEC would hope.