By Kevin McCoy
OPEC’s decision to maintain oil-production levels could threaten financing for some U.S. oil industry expansion and trigger market consolidation in an only-the-strong-survive scenario, economists and analysts said Friday.
The Organization of the Petroleum Exporting Countries’ Thanksgiving Day announcement that it would not cut production in response to weaker prices is seen at least in part as an effort to maintain market share amid competition from U.S. shale oil producers.
The move roiled energy markets in shortened holiday trading Friday, setting off a nosedive in the shares of many U.S. oil companies.
U.S. light crude (West Texas Intermediate) fell 10.2% to $66.15, while Brent crude dropped 3.4% to $70.15 for the day. Analysts predicted the benchmarks could fall further next week when traders return from the Thanksgiving holiday weekend.
Some oil industry analysts have already cut their predictions. Platts, a leading provider of energy markets information, on Friday cited Standard Chartered analyst Paul Horsnell’s forecast of $68 a barrel for Brent crude in a “chaotic” first quarter of 2015.
Much of the recent increase in U.S. oil production, the product of fracking and drilling in North Dakota, Colorado and elsewhere, is funded with borrowed money, said Philip Verleger, an economist and energy industry consultant who forecast an abrupt end to the trend.
“I think the lending to companies that are going to drill that kind of well is going to stop. Right now,” Verleger predicted in a Friday phone interview. “There’s going to be no more cash into these companies from the outside.”
Describing the aftermath of OPEC’s decision as a “pain train,” financial analysts at Robert W. Baird & Co. issued a Friday note that forecast need for a “double-digit percentage drawdown” in the U.S. oil rig count “to mitigate crude oil oversupply concerns.”
U.S. oil production won’t necessarily fall sharply in the short term, because companies with existing wells can survive even if oil prices drop to $50 to $55 a barrel, said Verleger.
“We may be about to find out what the break-even cost for the U.S. oil industry really is,” Jason Bordoff, founding director of Columbia University’s Center on Global Energy Policy, said in a Friday phone interview.
But Verleger added a key caveat.
“I think the vulture capital investors are circling,” with the aim of potentially buying weaker U.S. oil producers on the cheap, he said. ExxonMobil (XOM), which in 2010 bought XTO Energy, a Texas-based subsidiary with expertise in developing unconventional oil resources, could also hunt for acquisitions among independent U.S. oil producers hit by lower prices, he predicted.
“Some of these firms can survive. Some of them can’t. The ones that can will buy those that can’t,” said Verleger.
Lower prices could eventually prove to be an economic boon by forcing producers to find ways to reduce costs, predicted Norbert Ruecker, head of commodity research at global Swiss bank Julius Baer. “Today’s pain should make the marginal shale, deepwater or oil sands suppliers fitter, driving further cost reductions,” Ruecker said in a note cited by Platts.
Some analysts predicted the oil market’s financial gyrations could prompt OPEC to reopen discussions on production levels before the cartel’s next scheduled meeting in June. However, Verleger said key OPEC member Saudi Arabia would likely press to maintain the new status quo “until they’re sure they have their market share locked in.”Read more