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Opec split over tumbling crude prices but US companies safe for now

A supply glut has forced Opec members to cut prices to protect market share; US oil companies safe until oil hits $60/bbl

Clifford Krauss 

In recent days, several members of Opec - Saudi Arabia, Kuwait, Iraq, Iran and the United Arab Emirates - have lowered prices to European and Asian buyers as competition for global market share has grown fierce

Oil prices sank again on Monday, giving consumers more of a break and causing a split among Organization of the Petroleum Exporting Countries (Opec) leaders about what action should be taken, if any, to halt the slide.

The price drop has led to a near free fall in gasoline prices in the US. On Monday, the national average price for regular oil was $3.20 a gallon ($0.85 a litre), nine cents a gallon lower than a week ago and 14 cents below the price a year ago, according to the AAA motor club.

The price at the pump generally follows oil after a few days, leading energy experts to predict lower prices for the rest of the month at least.

"This is not your garden variety autumn price decline," said Tom Kloza, chief oil analyst at GasBuddy.com, which reports fuel prices from filling stations across the country. "Clearly there is a rift in Opec, and that means we are more likely to see a price war over six months. Crude oil is teetering on the brink of collapse."


Kloza predicted the national average for regular gasoline was heading to between $0.78 and $0.82 a litre. An average US household consumes 4,536 litres a year, translating into annual savings of $120 for every drop of 2.65 cents a litre.

Most oil analysts say the companies that have led the boom in drilling across North Dakota and Texas are insulated from the declines for the time being, with the break-even levels for investments around $60 a barrel - more than $20 below the current level.

With the number of rigs working in the US at or near record, some oil executives are beginning to express concern about investment decisions next year.

In recent days several members of Opec - Saudi Arabia, Kuwait, Iraq, Iran and the United Arab Emirates - have cut prices to European and Asian buyers as competition for global market share has grown fierce.

With the price of the global benchmark, Brent crude oil, falling 1.5 per cent on Monday to $88.89 a barrel, many analysts said Saudi Arabia, Opec's dominant member, might be rethinking its strategy.

At 11:55 pm IST on Tuesday, Brent was at $86.01 a barrel, 3.24 per cent lower than previous close.

"Saudi comments indicate it might have shifted from a strategy of holding prices at around $100 a barrel to a focus on market share," said Jeff A Dietert, head of research at Simmons & Company, an independent investment bank. "That means there is not an immediate floor on oil prices." He said he thought Saudi Arabia was trying to slow production growth in the US.

Oil prices have reached levels not seen since the West Asia and North Africa turmoil began in 2011 because of an unusual combination of factors. The demand for petroleum products is falling worldwide, particularly in Europe, just as the global market is flooded with oil.

Many energy experts say the world market, which consumes about 90 million barrels a day, has one million barrels more than it needs, though that could easily change if the Islamic State, also known as ISIS, attacked Baghdad and threatened the southern Iraqi oilfields, or if militias suddenly renewed their blockades of oil ports in Libya.

Prices of Brent oil and the American benchmark, West Texas Intermediate (WTI) crude oil, have slid by 20 per cent or more since early summer, when prices briefly spiked because of the Islamic State offensive in Iraq. The American benchmark dropped particularly hard over several days last week, suggesting a glut in several parts of the country, particularly West Texas, where production has been ramping up in recent years.

On the supply side, the US shale drilling boom has been a critical factor.

Domestic production has reached 8.7 million barrels a day, about a million barrels a day more than a year ago and the highest in nearly a quarter of a century. Imports from Opec countries have been cut in half since 2008, forcing countries like Saudi Arabia and Nigeria to compete with one another in Asia, cutting their prices starting last week.

While the US has been pushing up production month after month, so have other major producers. Saudi Arabia increased its production by 100,000 barrels a day in September, while Libyan production has increased in recent months by more than 500,000 barrels a day.

The Libyan production increase is because of an uneasy arrangement among regional militias that control the unstable country and central oil authorities to allow exports to leave the country. That flow could be interrupted any day.

Still, in its monthly oil market report released on Friday, Opec said its members had produced 400,000 barrels a day of crude oil more last month than in the previous one.

Venezuela has called for an Opec meeting to deal with the drop, while Iranian officials have called for production cuts. But Saudi Arabia is the crucial voice in the group; Opec is responsible for roughly a third of global production.

"If the price stabilises around here, it is probable the Saudis will argue to wait till the November meeting when Opec can cut the output quotas for the first quarter of 2015," said Michael C Lynch, president of the Strategic Energy and Economic Research consultancy and an occasional advisor to Opec.

On the demand side, the thirst for oil is declining in Europe, where unemployment and industrial activity is down, and Japan, where the use of oil by utilities is being replaced by natural gas and coal. Restarting Japan's nuclear plants next year will probably cut oil demand further, according to the US Energy Department.

Last week, the Energy Department reported oil consumption in the industrialised countries was down 200,000 barrels a day this year, compared with last year. The government expects US consumption, which increased by 500,000 barrels a day in 2013, to decline by 40,000 barrels a day this year.

The decline in oil prices has not yet had a measurable impact on oil production, but energy experts say long-term exploration investment planning could be affected if the price decline is steep and lasting enough. Large companies like Exxon Mobil, Royal Dutch Shell and Chevron make their investment plans years in advance, but smaller independent companies can be more sensitive to price swings.

"The shale plays in the US will become non-economic at WTI of $80 or so," said Ed Hirs, managing director of Hillhouse Resources, an oil and gas exploration company, referring to the American benchmark price, currently around $85 a barrel.

Other analysts say investments will not stop dropping in an important way till the US benchmark falls to $70 or even $60, since drilling has become increasingly efficient because of improved technology.

© 2014 The New York Times Service

First Published: Wed, October 15 2014. 00:56 IST
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