OPEC bumps up against the limits of its market manipulation
Reflecting its lessening oil clout, OPEC decided Thursday to keep its output target on hold and sit out falling crude prices that will likely spiral even lower as a result.There target price is about half what some of the countries need to meet their revenue targets. It means countries like Venezuela will have even more troubles just maintaining their equipment. It also means they are having to bow to a permanently lower price in order to deal with US production. That price may sink lower as the US becomes more efficient in its shale production.
Oil prices fell sharply on the news. Even though the decision was largely expected, it showed the once-powerful cartel is losing the power to push up markets to its own advantage.
The move to maintain a production target of 30 million barrels a day appeared to reflect acceptance of the Saudi view within OPEC that short-term pain had to be accepted for later gain.
The Saudis and their Gulf allies hope to put economic pressure on rival producers in the U.S., which need higher prices to break even. In the long term, that could help reaffirm OPEC’s dominance of the oil market.
It would also be good news for consumers and oil-importing nations.
International benchmark Brent crude plunged $5 to a four-year low of $72.76 a barrel. As recently as June it was around $115. U.S. markets were closed for Thanksgiving. The U.S. benchmark, West Texas Intermediate, fell 40 cents Wednesday to $73.69 on the New York Mercantile Exchange.
Oil ministers had come to Thursday’s meeting facing two unpalatable choices: Cut their production from 30 million barrels a day in an effort to boost prices and see OPEC’s market share fall, or do nothing in hopes of riding out the crisis.
Paring output may not have been very effective because supply from non-OPEC countries, like the U.S., remains high. Also, discipline within the 12-member organization is lax and overproduction by some members would have cut into the effectiveness of any production cut.
In any case, OPEC could not have afforded to scale back production by more than 1 million barrels a day — too little to make a sizable dent in supply.
By opposing an output cut, Saudi Arabia appears to be hoping to drive prices below the level at which shale oil production is economical. Experts say shale oil production turns too costly at the $60 a barrel level.