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Opec holds output steady amid talk of new price war

The 30 million barrel a day (b/d) ceiling was retained, and prices dropped as a result of the announcement

Opec’s decision here in Vienna on 27 November to keep its 30 million barrel a day (b/d) ceiling intact makes market share, not price, the group’s priority. Oil prices fell sharply on the news and analysts say Opec’s move could spark a deeper sell-off in the coming weeks.

Opec’s announcement, and the market’s immediate reaction, will ring alarm bells from Russia to Canada’s oil sands, with high-cost supply now directly in the firing line. In London, Brent plunged by about 9% within an hour of the decision, trading just above $71 a barrel (/b), before recovering some ground. WTI dropped below $70/b for the first time since mid-2010. 

Saudi Arabia, the group’s biggest producer, led the decision to keep the output target unchanged, overcoming appeals for a cut from Venezuela and Algeria. A senior Saudi official briefed analysts before the meeting that the kingdom was willing “to take its hands off the tiller” for a while and allow the market to drift.  

Adding to the bearishness of Opec’s decision was the manner of its announcement. Analysts expected that if the ceiling were kept, Opec would insist that members tighten output — which has consistently been above 30 million b/d — to the agreed limit. Abdalla El-Badri, Opec’s secretary general, made no such demand. “This is a free-for-all,” said one analyst in Vienna. 

The group also said it would not meet again until June, surprising Opec-watchers who expected an interim meeting in February. “This is very bearish,” said one. 

Opec is now deliberately targeting North America’s high-cost unconventional oil producers, whose fast-rising output has crimped Opec market share in the US and sent prices tumbling, said other analysts after the meeting. Several analysts said the move smacked of an emerging price war. “Saudi Arabia is taking the shale challenge head on,” says Bill Farren-Price, chief executive of Petroleum Policy Intelligence. “The hands-off approach will give the market some scope for finding its long-term balance.”

While tight oil producers are now in Opec’s sights, some of the group’s own members emerged unhappy with the outcome. Ministers from Algeria and Venezuela told Petroleum Economist before the meeting that they wanted deep cuts to stop the fall in the oil price. Rafael Ramirez, the Venezuelan Opec delegate and foreign minister, asked for cuts similar to those agreed in Oran in December 2008, when the group removed 2.46m b/d from the market. 

Algeria’s oil minister Youcef Yousfi said just before the meeting that he wanted oil prices “where they were”, and would be willing to trim the country’s supply as part of a group-wide cut. But Opec’s Gulf states, whose economies can more easily stomach falling prices, held firm in the meeting. Some members doubted that cuts would work, fearing they would simply reinforce the economics of rising tight oil supply in the US. 

Others said Opec had little choice, given that cutting would have helped rival high-cost suppliers. “Giving a higher price on a plate to US producers was not a smart option,” says Neil Atkinson, head of energy at Datamonitor. Asked whether Opec had a strategy to cope with rising supply from the US, the secretary-general was clear. “We gave our answer [to tight oil] today,” El-Badri says. “We are keeping supply unchanged.”

The group’s communique said that “in the interests of restoring market equilibrium [Opec] decided to maintain the production level (of 30 million b/d)”. The same communique also noted an “extremely well-supplied market”.  

Jamie Webster, senior director of oil markets at IHS, said that any efforts to take on US shale oil would be difficult. “At what price and how long does it take for shale to start coming off line? It’s a difficult question because it’s never been tested,” he says. Shale oil break-even prices were a moving target, he adds. “Even if you knew what it was six months ago, it’s different today.” As prices fall, so tight oil’s may break-even prices, analysts say.

Rystad Energy, a consultancy that provides cost estimates for US shale market, reckons US tight oil output would keep rising even at $60/b and even at $50/b it would need 12 months before only 500,000 b/d was shut in.

Today’s decision also means Opec could continue to produce above its 30m b/d ceiling. Iran, Iraq and Libya, which have all been in the past excluded from the unofficial quota system, each hope to lift output significantly in the coming months. To keep the output target intact, rival producers would have to make space for that oil.  

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