If you’ve been watching the oil market half as closely as Wall Street in general you’ve seen something rather remarkable happening this week. At the end of last month, OPEC finally decided that they were getting beaten badly enough with scandalously low oil prices and decided to jointly cut production. Since oil is always a significantly volatile global market, the system responded almost immediately, with oil climbing back up above the $50 per barrel mark for the first time in a couple of years. That helps out some of the member nations while not being high enough to significantly spike gas prices at the pump back in America.
So why not trim the flow back even further and bump those prices higher still? One OPEC spokesperson was extremely open about their strategy. The low prices have largely pushed U.S. shale oil production into low gear. It’s simply not profitable to produce when the price is down in the forties or even thirties. But if the price gets up to a few bucks above sixty dollars per barrel it will be rich times in the shale fields again and we’ll bust the market open, leading to another round of depressed prices. The Nigerian petroleum minister was quite clear about it in an interview this week. (Bloomberg)
Oil prices at $60 a barrel would be “ideal” for OPEC as higher levels risk sparking a recovery in competing supplies from the U.S., according to Nigeria’s petroleum minister.
The “urgency” felt by the Organization of Petroleum Exporting Countries and its partners to end the oil rout will ensure they adhere to their Dec. 10 agreement to cut supplies, Emmanuel Kachikwu said in a Bloomberg Television interview on Monday. The accord should push prices — at about $56 today — a bit higher, yet not enough to trigger a comeback in U.S. shale, according to the minister.
“Sixty I think would be ideal,” he said. “Once you begin to trend past the mid-$60s, you’re going to have a surfeit of shale producers jump back into the market. Technology is improving with shale every day, and so the cost of production is continuing to drop.”
Here’s the interview from Bloomberg which expands on that idea a bit.
This isn’t a declaration of war by OPEC or something we can really even criticize them for. It’s just business. But it’s worth keeping in mind that these nations aren’t stupid and they’ve been in the oil business for a long time. The emergence of the United States as a global leader in energy production has been terrible news for them and they want to do everything they can to keep our entry into the game limited. They’ve figured out that it still costs more to produce oil from shale than the sweet crude most of OPEC is still pumping. Holding the prices down to a particular level is the only way for them to continue making at least some money, when the alternative is to take disastrous losses if we flood the market.
Technology is improving every month, though. The cost of producing shale is going down and this trick may not work for OPEC much longer.