On 27 November 2014, ministers of the OPEC (Organisation of the Petroleum Exporting Countries) nations – which collectively account for around a third of global oil supply – held a meeting in Vienna and decided not to cut their production of oil in order to stop a slide in the commodity’s price.
According to the BBC, Brent crude reached its lowest point since August 2010 following the announcement, “falling below [US]$72 a barrel, before settling at [US]$72.82, a 5% drop on the day.” Brent crude has since fallen even further, sitting at just a hair’s breadth above US$70 a barrel.
For some perspective on how fast and hard the price of oil has fallen, Brent crude was at US$115 a barrel only in June this year.
Details of the meeting
In the OPEC meeting, the nation’s poorer members such as Venezuela, Iran, and Algeria had requested for sharp reductions in global oil supply to curb the rapid fall in oil prices. However, Saudi Arabia, which controls a third of OPEC’s total output, blocked calls for an output cut.
Mr. Ali al-Naimi, Saudi Arabia’s oil minister, had tried to reassure the other members of the cartel that the price of oil is likely to recover as the global economy picks up. In the meantime, he also mentioned that OPEC would actually have more to lose if they cut production because they might lose market share to the U.S. shale-oil producers in the longer term.
Although Reuters reported that several OPEC ministers who wanted production cuts were “visibly frustrated” with the decision, the 12-nations making up the group unanimously accepted it. Reuters also quoted Venezuelan Foreign Minister Rafale Ramirez as saying that OPEC is “going to see what will happen with production” on the U.S. side of things.
Why the fall in oil prices
With the U.S. shale oil boom, there’s been a glut in the supply of oil. The U.S. actually pumped out an estimated 8.9 million barrels of oil per day in October; in the previous month (September), the country actually produced 8.7 million barrels daily, and at that time, that was the highest recorded volume seen since July 1986.
The U.S. Energy Information Administration (EIA) further forecasts that U.S. oil production next year would hit 9.4 million barrels per day, the “highest annual average crude oil production since 1972.”
Furthermore, a slowdown of Chinese economic growth and a continuing recession in Europe has caused economic activity to weaken, leading to lesser oil demand. A double whammy of rising supply from the U.S. and faltering oil demand are likely to be the main causes of the one-third slide in crude oil prices seen over the past few months.
A Fool’s takeaway
The reason behind OPEC’s refusal to cut production is clear: They want to prevent a loss of market share to North American shale oil producers. When oil price dips, shale-oil becomes less economical to produce due to the high costs involved despite recent technological advancements in that area.
Therefore, while a price war might be painful in the short-term for OPEC, it could potentially render a portion of U.S. shale oil projects uncompetitive. This would help ease competitive pressures on OPEC and benefit them over the long run. In this sense, keeping oil prices low for the time being actually makes sense for OPEC nations.
For Singapore listed shares which are involved with oil & gas however, lower oil prices are detrimental to many, and this includes blue chips such as Keppel Corporation Limited (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51). Investors vested in oil-related companies may wish to do further research to see how the bleak outlook in oil prices may affect their earnings going forward.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.