OPEC Fires First Shot In Global Oil Price War

Yves here. Some readers took issue with our view that the Saudis, and now OPEC, decision against curbing production to support oil prices, was a classic example of predatory pricing, in which a player produces at an uneconomical cost in order to inflict damage on competitors, force them to curtail operations on a permanent basis, and then harvest higher returns later via having thinned out suppliers. As the post below indicates, it’s now increasingly recognized that the Saudis want oil prices lower, and a big reason is to weaken US shale operators (we also suggested that the Saudis also have geopolitical aims for this move, since the countries that get whacked have either been unfriended by Riyadh or are official enemies).

Analysts have taken almost entirely to discussing the Saudi “fiscal breakeven” which is the oil price it needs to raise enough revenues to funds its government, at $90 a barrel, to contend that the Saudi’s can’t afford to allow prices to remain low for all that long. But the desert kingdom has a lot of unused borrowing capacity and clearly does not see its near-term budget issues as a driving consideration. Ambrose Evans-Pritchard, based on a Citigroup analysis that has been making the rounds, argues that the Saudis have misread US shale economics and also contends that many producers have hedged their output, insulating them from the downdraft. Despite its detail, the Citigroup analysis diverges in so many respects from other accounts that I’d like to see more corroboration (recall Goldman’s similarly celebrated forecast that oil was going to over $200 a barrel.  Now the Citi view may have merit, but the realization that shale wells have short lives, at least in terms of major production, was new news in the media as of early 2012. The fact that investors in shale were often still using traditional oil production models up until that time reflects the limited experience with extraction method in these geological structures. Thus while the “short lives” assumption may indeed prove to be an overcorrection, I’m not certain that enough experience is in to speak with confidence about the durability of the “tail” or “legacy” from these wells).

By Andy Tully, news editor for OilPrice. Originally published at OilPrice

OPEC’s decision not to cut production to shore up oil prices drove down the price of oil even further in a strong challenge to American shale oil producers – or, in less delicate language, the start of an all-or-nothing price war.

The immediate result of OPEC’s decision was a further drop in the price of the world’s leading benchmark oil, Brent crude, which lost $6.50 per barrel, falling to $71.25 on Nov. 27, its worst performance in a single day since 2011. Brent soon had a weak rally, raising its value to $72.55.

The price of oil has now dropped by nearly 40 percent since mid-June.

But expect Brent and other crudes to fall again, says Igor Sechin, the CEO of Russia’s government-owned oil company Rosneft. He said the average price of oil could go below $60 per barrel during the first two quarters of 2015.

OPEC’s big decision was not to lower its total production cap of 30 million barrels a day, turning aside pleas from less-affluent cartel members, who said the current oil glut has left them unable to afford to sell their oil at such oil prices. They had urged OPEC to reduce production by 1 million barrels per day.

Abdullah Bin Hamad al-Attiyah, who served as Qatar’s oil minister for nearly 20 years, countered on Nov. 19 that any decision to reduce production should be shouldered by major producers who aren’t in OPEC. “Russia, Norway and Mexico must all come to the table,” he said. He may just as well have included the United States.

All these non-OPEC producers recently have been harvesting oil at record or near-record levels contributing to the global oil glut that couldn’t be remedied by a simple OPEC production cut of 1 million barrels per day.

American energy companies lately have been enjoying a production boom by extracting oil and gas locked in underground shale formations. To get at the oil, though, they must resort to the new technologies of hydraulic fracturing and horizontal drilling. These methods are costly, and most observers say they’re unsustainable if the price of oil fell to or below $60 per barrel.

Jamie Webster, an oil analyst at the consultancy IHS Energy, told the Financial Times that OPEC’s decision was “a very aggressive test for US shale. It’s a new gambit for OPEC to try.” But the test is just as aggressive for other producers, particularly those relying on other expensive extraction techniques necessary for Brazil’s deepwater wells, Canada’s oil sands and Arctic offshore oil.

But US oil companies may be the most vulnerable, according to Leonid Fedun, a board member at Russia’s Lukoil. He told Bloomberg News that even at the current price of slightly over $70 per barrel, smaller companies involved shale extraction are beginning to feel the financial pinch.

As oil prices continue to fall, Fedun predicted, so will the smaller companies. “The [US] shale boom is on a par with the dot-com boom,” he said. “The strong players will remain, the weak ones will vanish.”

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      1. GlassHammer


        Didn’t the chain of events start in early October (QE’s end) when the dollar hit a 4-year high?
        More than a few analysts have suggested that OPEC was responding to a rising Petrodollar.

      2. Jim Haygood

        ‘Russia is getting almost as much in local currency terms as it did before oil fell.’

        Whereas Venezuela has actually leveraged itself to the oil price drop:

        Rather than allowing its currency to decline like the ruble, the government of Nicolás Maduro has insisted on maintaining a fixed, multiple-tier exchange rate system that vastly undervalues the dollar. How much so? According to Francisco Rodriguez of the Bank of America, the dollar is now worth 1,700 percent more on the black market in Caracas than the [official] price.

        The result is staggering economic disarray in what was once Latin America’s richest country. Basic goods — cooking oil, rice, coffee, sugar, corn flour and even toilet paper — have become scarce, even as inflation soars above 60 percent.

        Rather than embrace Mr. Putin’s logic — also known as Economics 101 — the government has resorted to schemes such as installing fingerprint readers in stores in order to enforce rationing. Meanwhile, regime insiders with access to cheap dollars reap windfall profits.



        Running a strong-currency regime when the rest of the planet is playing ‘competitive devaluation’ is a hard slog [see USA, 1929-1933]. No coherent explanation has ever been offered for it.

        Ultimately, it’s a monomaniacal obsession with maintaining the currency at a fictitious par, much as Britain did in its lost decade of the 1920s, after reinstating the pre-WW I gold parity for sterling. Unlike Britain and the USA in the early 20th century, Venezuela has absolutely no other internationally competitive sectors to fall back on. It labors under the ‘resource curse’ of all oil, all the time.

        1. Yves Smith Post author

          What is hurting Russia most about the sanctions is the restrictions on having Russian companies, most importantly banks, raise funds abroad, like issue Eurobonds.

          Russia was defending its currency, and the big reason again seems to be its banks, that they did mismatched funding (as in funded some ruble operations in foreign currencies). On a terms of trade basis, there does not seem to be an obvious reason to prop up the ruble, but readers might have insight.

          1. Chris Geary

            I’m guessing that falling ruble = higher cost of imported consumer goods, but then again that *might* stimulate local industry

          2. Paul Tioxon

            There is a much wider range to the sanctions, although the primacy you attribute to the financial is an open book to you, before much of the naked Russian military aggression in the form of the forced theft of sovereign Ukraine territory, there was a business rift with the All American War Party of Texas. The attempt at cancellation of Russian helicopter contracts to Afghanistan by the US Pentagon was to steer military contracts to Bell Helicopter Texas plants that would be losing US Military Dollars to the Russians. Even though the Afghans had been flying Soviet Era air craft since the 1970s and since then were most familiar with those copters and could fix and maintain them as well, even more important than just buying them, the more profitable replacement parts, and technical servicing contracts, and would not disrupt the DEPARTURE OF AMERICAN MILITARY FROM AFGHANISTAN, having not only the business, but keeping American advisers and technicians to train to fly, and maintain the copters would also require some small military security presence to protect the military contractors. This long simmering battle over who sells what has been going on for a couple of years now.



            Although the Red Scare speeches of Texas Senators could not derail the DoD, small arms imports of the very popular AK-47 from authentic Russian arms makers was halted by Obama’s economic sanctions. This small gift to peace on the streets of American cities is welcome as is the unusual silence of the lunatic mainstream NRA. Of course, everyone that owns an AK is drooling over the speculative futures market in selling once the sanctions hit a year or so, driving demand and prices to crazytown levels for gun nuts that absolutely, positively, have to have every killing machine known to mankind!!! Apparently, some people really and truly want out of Afghanistan by years end, they can taste it. So, Russian copters in, Boeing, Nyet!

      3. vlade

        that depends on whether the plumetting ccy will or will not end up in higher inflation (which now runs at close to 8% from justo over 6 at the start of the year)

        1. Yves Smith Post author

          I’m told Brazil stood up well to even higher inflation by virtue of developing very good inflation accounting. The Russians lack that, and inflation over 4-5% really messes up your ability otherwise to have any idea how a business is really doing.

          1. vlade

            That’s one of the problems, but my point was more than anything weak ruble might give inflation may take away quickly..

    1. Sam Kanu

      The US has more direct way of hammering Russia and I doubt that oil is the weapon of first choice, given the domestic effect on shale oil.

      The Saudi angle however is interesting, particularly from a perspective that the Saudi “Royals” are completely propped by US military might. Absent that, they would themselves have been ISIS’ed a long time ago. The Saudi “royals” aren’t exporting wahabism because they want to . I mean look at their lifestyle – they own multiple 777s, 747s, Airbuses, 737/BBJs as private jets and countless Gulfstreams etc:

      So this aint Wahhabism these folks are living – they have been exporting Wahhabism purely in an attempt to keep their own nutcase clerics onside with crackdowns on domestic would be revoltionaries who are wasabi-influenced.

      So if the Saudi Royals start monkeying with the US, I would think that they are grave risk of the US simply pulling the stool out from under them by for example:
      1) not sharing key surveillance information to keep them ahead of radical domestic regime change agents
      2) Playing games to promote the rise of a previously unfavored wing within the “royal” clan that would be more pliant to the US needs
      3) Seeding externally sourced strife eg ISIS

      Look at Bahrain:
      – the Saudis could be there very shortly – and much worse in no time at all…

      1. Yves Smith Post author

        I agree completely that the Saudis have targets for their use of oil as a weapon. But Russia as #1 seems implausible. Iran is much higher on their list.

        1. Fool

          Yup. Everyone has their own theories, but Iran sounds like the best bet. At the very least, this should put some pressure on them the next time Bibi comes knocking or come time talks in July (whichever comes first). This raises questions about who stands the most to gain. In any case, one can always rely on mainstream (media) narratives to be false (or at best neutered).

    2. Doug Terpstra

      Mike Whitney strongly supports this view of Great Game geopolitics, focused on Russia, Ukraine, and Syria. This seems more plausible to me than Saudi Arabia being allowed to go rogue simply to cripple US frackers.

      Whitney ties together a number of seemingly unrelated events, including Kerry’s recent trip to the kingdom, the pseudo-war on ISIS, Gaza’s Israel’s natural gas, Qatar’s pipeline, etc.. I strongly suspect this also relates to Obama’s latest flip-flop in escalating the war against goatherders in flip-flops in Afghanistan — for yet another alternate pipeline. You need a foil hat to believe these “chaotic” events are really isolated.


  1. Jesper

    Might it be a play to get more countries to join OPEC?

    Oilproducing countries outside of OPEC has little say on what OPEC does, joining the cartel might change that.

  2. David Lentini

    I don’t follow this sector too closely, but the Evan-Pritchard article looks a lot like anti-OPEC PR. I hate to say it, but increasingly I’ve found his wrirting to be a bit more slanted than I recall in years past.

    1. Jesse

      So has everything coming out the past week screaming “shale goes bankrupt if prices move under 85 (75, 65, etc.)” been pro-OPEC PR then? Hes doing what a good journalist does and questioning prevailing attitudes.

  3. scott

    It used to be if we had to protect a vital industry from this sort of thing we would slap a tarrif on it. Set a floor of $90 and collect a tarrif of every dollar below that.

    1. Steven

      I am not a friend of fracking but I AM aware of the extreme importance of oil to the economy and to national defense. Having off-shored much of its industry (and exhausted its military in stupid, senseless wars on terror), the US may no longer be capable of fighting a large conventional war. But that oil – those

      “last hours of ancient sunlight”

      – is going to be needed to sustain American agriculture and a population which most likely has outgrown the ability of sustainable (i.e. without fertilizers and other petrochemicals) for a long time to come.

      That’s a long way of saying “I share your concern.” I have wondered ever since Reagan had the solar panels Carter installed on the White House removed, just exactly WHO dictates not only US foreign policy but domestic economic policies as well.

      1. Chauncey Gardiner

        Interesting question you posed, Steven. Someone has pushed Oil futures up over 7 percent this morning.

  4. Moneta

    It’s funny how the US can use all kinds of uneconomic pricing techniques (tax credits, subsidies, bailouts, zirp, QE, deficits, etc.) and get away with it. But everyone gets so indignant when other countries use the only techniques they have at their disposal to control their own situation that is impacted by US manipulations.

    1. Jim Haygood

      It’s not predatory when ‘we’ do it! /sarc

      Since no one has a clue where this all stops, we might as well appeal to the E-wavers. Studying the long-term chart below, they will tell you that the pattern since mid-2008 is a classic a-b-c, with wave ‘c’ having the same objective as wave ‘a’ — about $35 a barrel.


      This is a generic pattern in commodities: dire squeeze followed by price crash. Lacking antigravity shields, they don’t just motor smoothly uphill the way stocks do.

      1. Moneta

        How many more empty cities could China build before some kind or shock occurs? We can look at it technically or fundamentally… It had to slow down, no?

    2. Yves Smith Post author

      I’m not indignant. I wrote admiringly of the Saudi failure to support oil at $90 at hitting virtually all of its commercial and geopolitical targets at once. I may have even called it a master stroke.

      “Predatory pricing” is a term of art and it fits like a glove here.

      I also happen to be anti-fracking, so if they succeed in damaging the frackers, even better. However, low energy prices will also hurt renewables.

      1. Moneta

        I wasn’t including you in that group but I must admit my post did not make that clear. You were just calling a spade a spade while most are not as discriminating.

    1. peteybee

      not just in the UK, but everywhere in the world outside the US.

      THIS may be a more realistic goal for OPEC. What can be done in North America could surely be done anywhere else. All it took was a ~10 year period of sufficiently high prices, and the technology became fully developed.

  5. Chauncey Gardiner

    Assuming it holds, it will be interesting to see how this plays out over the next three years and beyond. The headline to this post suggests you believe there will be subsequent developments in the price war. Maybe, just maybe, this will provide some fiscal stimulus to a very sick global economy.

    I appreciated the observation regarding the impact of this move on near term development of deep water, oil sands, and Arctic offshore. Also, I suspect the secondary effects on currencies, interest rates, and existing debt will not become evident immediately. For example, I read yesterday that Rosneft has itself taken on $60 billion in debt. And then there are the well publicized issues of U.S. junk bonds used to fund shale oil development in the U.S. Wonder who the major debt holders are? (What’s that old Wall St. proverb about figuring out who the sucker at the table is?)

    Also, I have read that not all U.S. shale has the same breakeven costs. For example, Eagle Ford reportedly has a breakeven of around $50 bbl. Ditto some Mountain Trail wells in the Bakken.

    Finally, there’s the issue of who the “Big Shorts” are in all this? … “L’oie de Noel est gras.”

  6. peteybee

    The article makes an important point about US tight oil production. The rapid decline results in most of the revenue coming out within about 2 years. The short time scale ironically works to their advantage here, as it keeps them nimble, as market-price disasters can only set these producers back by ~2 years worth of capex. Other high-cost’s like under-sea production or Canadian tar sands will have to eat a bigger portion of what are now their “mistakes”.

    The flip side of this, I suppose, is the gold-rush mentality. Not sure if that is more prominent in the US than outside. Speculative land-buying sprees or excessive leverage + bond market turning on you… That’s what’ll do you in.

    Lastly, to repeat, as far as US tight oil is concerned, this is all a replay of what happened to US natgas in 2009-2011. Prices collapsed. Production did not.

  7. Dino Reno

    Do the Saudi’s have a predatory pricing strategy to maintain market share in the face of overproduction? All the heavy lifting about oil pricing seems be done on the supply side and not on the demand side that is in decline. The fact that the oil pie (ugh!) is getting smaller is the whale in the room that cannot be discussed because this would create real panic instead of managed chaos. Lower prices must seen as temporary and as part of grand strategy otherwise the financial implication would be too horrible to contemplate. This is being billed as the Battle of the Oil Titans and the first one to blink bites the dust and then prices go sky high again. The Saudis are the swing producer so they can call the shots in this scenario by maintaining production and driving prices lower to break the back of U.S. shale oil. Their goal, according Citi Bank, is to knock out 500,000 barrel a day, or one half percent of the world’s supply.
    To do that they are supposedly ready to lose trillions now to make billions more down the line.
    What wrong with this plan besides the obvious? Lower demand will keep driving prices lower if production rates are maintained. But won’t the Saudis make it up on volume if they maintain market share? We all know that’s a silly business proposition.
    I’m opting for an Occam’s Razor explanation for the current state of oil pricing.

  8. An arb is a beautiful thing

    I’m confused how you went from one KKR anecdote to “knowing” the industry is valueing the production profile of shale wells incorrectly? Can anyone point me to the post’s link? I highly doubt the KKR anecdote you use can be applied broadly to the whole industry in terms of not understanding how shale wells work. Investment houses have known since 2002-2004 how shale wells work (at least the ones I’ve worked at). If the KKR rumor is true, then it is not representative of how most people in industry value these plays.

    The barnett shale has been producing for over a decade. Many of those wells are very old and in the “tail” of their production cycle. There have been forests cleared to produce the paper to print all the presentations of shale well decline curves over the years. It’s just not a big mystery. If you are worried about the “tail” production out past the first decade of the well, don’t worry about it, no driller is. All the money is in the first 1-3 years anyway.

    My last point. More than anybody else, the Saudi’s understand how to defend their market share position here. Please look at the historical data of oil production the last time there was a huge tech shift in production technique. 1977-1985 (EIA, IEA or BP world review). That period coincided with a massive increase in North Sea and Gulf of Mexico prod growth, and slowing demand due to price shocks. Saudi cut their production over 50% to try to stabilize the price, and they failed massively. I believe the shale boom is similar to that period.

    My guess is a lower crude price in Q2 15, as currently budgeted shale projects are brought online.

  9. Bill Frank

    Are the Saudi’s really going after US shale producers or is this just a cover story? I think the Saudi’s don’t give a damn about our fracking operations. Shale oil does not threaten Saudi Arabia. The Saudi’s still rely heavily on the US for the latest in weaponry and they’re not going to jeopardize access to the hardware they want. Rather than working to weaken US domestic shale interests, the Saudi’s are actually working with US interests to weaken mutual “enemies” Russia and Iran. In effect, an economic war is taking place. That news wouldn’t play well in the MSM. Best to manufacture another explanation for folks to chew on.

    Citigroup analysis? After everything that has happened, how can anyone lend a smudge of credibility to any “analysis” put forth by the bankster cartel.

  10. Fool

    Ugh, where’s Marc Rich when you need him?

    In all seriousness, though, something about this narrative of the Saudis putting pressure on America sounds off to me: don’t the Saudis generate their power from America (oil demand, guns, marginalization of Iranian economy/military, etc.)? Moreover, I would argue that the oil&gas market in the US can remain solvent — via capital markets (mergers/takeover of smaller players) or development of midstream capacities (export hubs or Canadian pipelines or wtv) — for longer than the Saudis can undercut the market.

    If anything, it would seem as though the Russians stand the most to lose as their access to capital markets have been hampered by US sanctions. But hey, what do I know, as you can see I am pretty foolish when it comes to the Oil Trade.

  11. Jackrabbit

    For the most part, I agree with the notion that Saudi oil actions this are anti-Russia, not anti-US.

    I wasn’t quite sure until (not meant to be an exhaustive listing):

    a) the Saudi’s refused to lower their production in the face of an outcry from OPEC;

    b) the failure of the negotiations over Iran’s nuclear industry (which was mostly expected);

    c) renewed tensions in Syria/Ukraine (after a lull); and

    d) the ouster of Hagel.

    Also agree with Fool: the Saudis can’t really “kill” US shale production as the tech is there and will restart as soon as the price recovers.

    I once thought that the Saudi’s might want to jumpstart world economic growth (recession/depression being somewhat bad for oil prices) but if that were so, I think the price fall would have been better managed.

    H O P

  12. Wry Guy

    Of immediate interest to the Saudis, both Iran and ISIS need a high oil price to be successful.

    Of intermediate threat to Russia, they’ve been a net food importer since the 70s. The falling Rubble has already caused a scramble for trade swap deals like vodka for food, basically anything not denominated in foreign currency which is what the South Americans should have done years ago if their leaders weren’t simply interested in scalping their own people.

  13. John Yard

    In respect to oil, the Saudi’s et al. are the low cost producers – by far. If there is a mismatch of demand and supply , it is the high cost producers who will shut down. No conspiracy here.
    By the way, a sustained fall in the price of oil, like other commodities since 2009, is the best news for the world economy since 2009. Further falls may power our way out of the cul-de-sac we have been in since 2009.

  14. Fiver

    The idea that the Saudis are ‘taking on’ the US in something as big as this is quite simply absurd – the US could decapitate the Royals and shut down its industry without firing a shot. What we have is the intersection of several ‘known knowns’ in Rumsfeldian terms, which are the only ‘knowns’ that matter for strategic decisions.

    A high oil price was required to support the US shale boom, and the steadily contracting US oil industry, to begin with. That was delivered by the Iraq War, the sanctions on Iran, the destruction of Libya – the ‘war premium’ – blocking Keystone XL (for Warren Buffet among others) and $4 trillion or so in QE-driven super-financialization.

    All was proceeding nicely until Russia intervened on behalf of its ally Syria, insisting diplomacy (Syria agrees to destroy its chemical weapons) ought to trump US bombing in response to a trumped-up charge that Assad’s military had used chemical weapons (long since proved false). For that, Putin earned the demented hatred of US neocons and their global allies, the Saudis, the Turks and others out on a limb having destroyed Syria and created 10 million refugees without a ‘win’ – that the perverse assault on Syria should never have been launched is of course buried deep in the MSM propaganda pond.

    Meanwhile, US ‘tight oil’ production steadily climbed, while QE greased the grease. The coup was launched in Ukraine, even as ISIS was created from the grab-bag of the (ultimately) US-sponsored mercenary ‘jihadist’ proxies in Syria, and loosed on Al Maliki in Iraq. Short shrift was made of him, and the US received the big, shiny invitation back into the Iraq it had never wanted to leave – let’s not forget the reason the US left was it could not get a SOFA that gave any US person immunity from simply killing people, and more satisfactory final oil agreement terms.

    So, we have a looming-all-year supply/demand mismatch that became tangible as global demand failed to materialize as per Fed, IMF and other serial misreaders of events hoped. Key players would’ve known almost exactly when the supply-demand lines would intersect, as well as when QE would be definitively turned off (or not). Throw in a run on PIMCO (now $100 billion) creating the need to liquidate huge sums to fleeing investors, thus the makings of the October 15th mini-crash, then the announcement of no more Fed QE (but a mountain of Japanese QE) until sometime after markets come undone next year, and we all know the oil price story from there.

    It is reported that the US Admin is close to opting for a No-Fly Zone for “humanitarian reasons” on the Turkey-Syrian border. This, if carried through, means a new ‘rebel’ army will be created there to take down Assad once and for all, of course a delight to the Saudis et al. As does the prospect of Iran keeling over. Both of these, Ukraine’s oil, and ultimately the vast, vast resources of Russia just mesmerize US capital (Wall Street). The Empire sees a shot at taking out the whole deck and Venezuela in one shot – but the window is much more narrow than is generally believed, as the negative impacts compound rapidly.

    In my mind the US/Saudi (and frankly, Israeli) gambit is just this side of completely insane. The potential upside is more power over a very beaten up world. The downside is – a very beaten up world with no prospect whatever of cooperation to meet what are in fact much, much larger challenges. I am not at all optimistic about the outcome.

    Just go back and check the various time-lines. This is how an Empire operates.

    1. Sam Kanu

      Good points. But will Turkey allow the US this no fly zone? I would think Turkey benefits from Syria and Iran’s continued position as bogeymen, which makes Turkey a useful ally. Absent that, Turkey starts to look like the next target for empire building…..

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