OPEC appeared likely to maintain its policy of high production levels at its annual meeting in Vienna, according to reports, a decision that will continue downward pressure on crude prices in favor of greater market share.
The decision to stick to the strategy was expected, but it is risky for countries that need the revenue, especially smaller producers in OPEC. OPEC’s own basket of crude grades is below $38 per barrel – a fraction of what most members need to balance their budgets, Reuters reports. Sharply lower oil prices have caused serious damage to the fiscal budgets of weaker members such as Angola, Algeria and Nigeria.
Saudi Arabia said it would be willing to cooperate on production cuts if Russia, Iran, and Iraq also participated. Russia is not a member of OPEC, but is the 3rd largest oil producer in the world, and it did not favor cooperation with OPEC on pricing. Iran’s oil minister said it would not consider cuts until its country’s production was at full capacity following the lifting of sanctions in the wake of its deal with the P5+1 countries over its nuclear program.
Shale oil in the United States
The United States shale industry is a target of the pricing strategy by the cartel, but so far, shale has proved resilient to the strategy – mostly because of how shale oil production works. Companies can prepare wells without bringing them into production, allowing the costs to be incurred on the front end, and higher profits on the back end, writes Gary Bourgeault in Seeking Alpha.
Shale producers in the United States are feeling the pinch of lower prices, but have largely maintained production. According to CNBC.com, U.S. production has leveled off after hitting a peak of about 9.6 million barrels per day in April, but output has declined only slightly despite the number of rigs operating in U.S. oilfields collapsing by nearly two-thirds from the heights of last year, before OPEC’s strategy was implemented. Ohio’s Utica Shale continues to set production records.
Saudi Arabia can weather lower prices longer than other OPEC members, but its fiscal policy is also under the stress of lower prices.
