Crude oil dropped sharply after the Organisation of the Petroleum Exporting Countries (OPEC) elected not to cut oil production.
Both Brent and WTI crude prices fell heavily after the meeting with Brent dropping below $US75 for the first time since September 2010 as the Kuwait oil minister told journalists that the cartel’s oil production target would remain unchanged at 30 million barrels a day.
Here’s a link to the full OPEC statement but below is the key passage (emphasis added):
The Conference also noted, importantly, that, although world oil demand is forecast to increase during the year 2015, this will, yet again, be offset by the projected increase of 1.36 mb/d in non-OPEC supply. The increase in oil and product stock levels in OECD countries, where days of forward cover are comfortably above the five-year average, coupled with the on-going rise in non-OECD inventories, are indications of an extremely well-supplied market.
Recording its concern over the rapid decline in oil prices in recent months, the Conference concurred that stable oil prices — at a level which did not affect global economic growth but which, at the same time, allowed producers to receive a decent income and to invest to meet future demand — were vital for world economic wellbeing. Accordingly, in the interest of restoring market equilibrium, the Conference decided to maintain the production level of 30.0 mb/d, as was agreed in December 2011.
This looks likely to be the official OPEC target until at least the middle of next year, with officials announcing that the next meeting is planned for June 2015.
One theory for why OPEC is allowing prices to fall is that the cartel (and particularly Saudi Arabia — it’s largest member) is attempting to fight off competition from US shale oil and maintain its share of the US market. Keeping prices below $US100 a barrel will put pressure on higher cost US shale producers and will prevent further erosion of OPEC’s position in the Americas.
It would be a difficult task. As Ed Conway, Sky’s economics editor, said on Twitter the US has not see as large an increase in its domestic oil production as it has achieved in the last few years since the 1920s. The additional supply has overwhelmed reduced production from OPEC members over the last couple of years.
However, there may be a more fundamental shift going on in the oil market at the moment. The problem for OPEC is that it may no longer be able to control prices (as it has in the past) to avoid these problems.
Previously, OPEC members would agree to cut oil production if falling prices posed a threat. That may now have changed because of the shale oil boom in the US, which has dramatically increased supply.
As Goldman Sachs wrote in a recent note (emphasis added):
[There is a] realisation that the OPEC reaction function has changed and that the US shale barrel is now likely the first swing barrel … When Saudi Arabia cut prices to Asia for November delivery it was interpreted as a shift in the Saudi reaction function to a focus on market share. This should have not been a surprise in the new world of shale that has flattened the supply curve, as economic game theory suggests that they should not be the first mover and that the US shale barrel should be the new swing barrel given how easily it can be scaled up and down.
That is, OPEC may simply not want to reveal just how weak its hand is.
The rouble is crashing on the news creeping towards 48 roubles to the dollar: