The Need-to-Know on Last Week’s OPEC Meeting

Just when the oil price slide appeared to have stalled, OPEC’s decision last Thursday to leave its production quota unchanged caused Brent Crude futures to collapse 8 percent that day, and fall from $76 on Thursday morning to a low of $67.50 per barrel on Monday. Prices have returned to above $70 per barrel for now, but one thing is for sure: volatility has returned to the oil market, and how. As for the meeting itself, it was Saudi Arabia versus the world, and the Kingdom won, as oil minister Ali al-Naimi was uncooperative with united calls from Venezuela, Iran, and the other prices hawks for a significant production cut. We break down some of the implications on our blog, but you don’t have to take our word for it. Here’s what you should read to get up to speed:
  • At the Council on Foreign Relations, Michael Levi articulates why this might not be the “new era” for OPEC and oil that some have hailed, providing some valuable historical context on past OPEC cuts. In the Financial Times, Levi also argues that low oil prices create an opportunity for eliminating wasteful fuel subsidies that incentivize excessive consumption.
  • Also in the FT, reporters note that OPEC’s decision ultimately threatens up to $100 billion in capital investment in oil production worldwide, with brutal implications for both energy stocks and currencies of oil producing nations. It’s also bad news for the “junk bonds” that have financed the U.S. shale boom, as the Wall Street Journal reports that the price drop could lead to a “massive wave of defaults on that high-yield debt” in 2016. Steve Levine, over at Quartz,isn’t so sure.
  • But even while producers are hurting, the economic benefits are likely to outpace the pain in the energy industry. According to Citigroup, even oil prices in the $80s are equivalent to a $1.1 trillion global stimulus package (which, of course, we can safely expect to bolster global oil demand in the medium term).
  • And what does this mean for supply? Consulting group Wood Mackenzie, quoted in the FT, posits that .6 mbd of U.S. shale production is threatened if Brent crude prices stay below $75-$80 through 2015. Daniel Yergin of IHS sees a lower breakeven range, of $50 to $69 per barrel, but also points out that production declines might be more widespread in international projects, rather than in the United States where many are watching. He is also sure of one thing: “the drama is far from over.” On that point, we definitely agree.