The decision by OPEC on Thursday not to cut oil production, despite a price decline of over 30% since June, means U.S. shale-oil producers may soon find business to be unprofitable.
Hydraulic fracturing is far more expensive than simply pumping from oil wells that tap into huge reserves close to the surface. That is why Saudi Arabia is perfectly willing to let oil prices fall even further as it defends its market share. That country has another clear advantage: The kingdom at any time can easily raise or lower its production.
For U.S.-shale companies, long-term expansion plans may have to be severely curtailed, especially if OPEC and major non-OPEC oil producers, including Mexico and Russia, continue on their current path.
The S&P 500 Index was little changed Friday, but among 186 U.S. oil stocks with market values of more than $50 million, 56 were showing double-digit declines in early trading.
On the New York Mercantile Exchange, light sweet crude futures for delivery in January was off $4.55, or 6.3%, to trade at $69.18 a barrel on Friday. But the drop primarily came on Thursday, when the U.S. was focused on Thanksgiving, and the U.S. holiday meant there was no settlement price, making the drop based on Wednesday’s close.
January Brent crude on London’s ICE Futures exchange rose 49 cents, or 0.7%, from Thursday’s settlement to $73.04 a barrel after trading at its lowest since August 2010. Brent is the global oil benchmark.
Oil prices have lost around 35% of their value since their peak in June, and OPEC’s decision to maintain its current production ceiling of 30 million barrels a day does little to remove the glut that has kept oil prices low.
On Friday, analysts warned of an oil surplus around 1 million barrels a day for next year, which would continue to keep prices low.
“The oil price is likely to continue falling until rising demand and declining non-OPEC supply get rid of the oversupply. The key role in this looks set to be played by US shale oil producers who will probably face more and more problems at prices below $70 per barrel,” analysts at Commerzbank said in a note Friday.
[from reports published by MARKETWATCH]
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