OPEC changes its strategy

Bloomberg/Fuel Fix:
OPEC finally blinked in its two-year price war with U.S. oil producers. Whether that translates into a financial victory for the American shale industry remains to be seen.

Oil prices and the shares of U.S. drillers kept climbing on Friday, two days after the Organization of Petroleum Exporting Countries promised its first production cut in eight years. The U.S. companies will need oil to hold above $50 a barrel for months before they commit to more spending, according to analysts at firms including S&P Global Platts and Oppenheimer & Co.

OPEC’s surprise announcement still represented a “capitulation” to drillers in U.S. shale basins, who proved much harder to eliminate than their opponents expected, said Katherine Richard, chief executive officer of Warwick Energy Group. The privately held group holds stakes in thousands of U.S. oil wells, including new plays known as the Scoop and Stack in Oklahoma.

“They are saying, ‘We can’t grow and we can’t fund our economies at $40 and $50 oil,”’ Richard, based in Oklahoma City, said in a telephone interview. “It’s the opposite in the U.S., where producers in the Permian and the Scoop and Stack are making 20 percent-plus returns.”
The old strategy which I have described as a suicide pact clearly did not work.  Only two OPEC countries were breaking even or better under this strategy.  The richer members were burning through their reserves and could not sustain the losses much longer and the weaker members teetered on the brink of bankruptcy.

The strategy did not count on the US producers becoming so much more efficient and focusing on certain sites that were relatively inexpensive to produce such as the Permian basin.  The increased price is probably good news for Eagle Ford drillers and those in North Dakota.

OPEC is having to come to grips with losing one of their major importers as the US becomes more self-sufficient.


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