Alex Mills
By Alex Mills
About one year ago (November 2014), the Organization of Petroleum Exporting Countries met to decide what to do about all this new oil production coming from the United States. What OPEC decided to do was nothing, and continued to produce at their current levels.
The world and the U.S. had an oversupply of oil, and OPEC felt that eventually prices would decline forcing the high-cost production in the U.S. to cut production.
However, many of the countries did not realize that the price reductions would be so quick and so far. Within a few months, prices declined from $100 per barrel to $50 per barrel.
Initially, many U.S. companies who had high-cost production had a portion of their production hedged against a collapse in price. Therefore, they could continue to produce and receive the hedged price. But, as time passed so did the ability to hedge oil prices at the 2014 rates.
Now, the Energy Information Administration (EIA) says that oil production in the U.S. has declined 500,000 barrels per day, which is the first indication that U.S. production is responding to the decline in price. EIA says that current production is almost back to November 2014 levels.
However, crude oil inventories at Cushing, Ok., the major trading location in the U.S., remain high. U.S. crude oil inventories rose 8 million barrels last week, the EIA said. The build was more than double the 3.9 million barrels forecast by analysts.
Because U.S. production kept going for about six months after OPEC’s decision not to cut production, the market is just now getting back to where it started.
The pain has been felt throughout the upstream and midstream oil industry in the U.S. and foreign producers are feeling the financial pinch as well. Decline in oil revenues as well as unbalanced budgets with huge deficits and slumping currencies have created political problems for leaders in Venezuela, Libya, Algeria, and Iraq.
One estimate from the International Monetary Fund has OPEC members losing $370 billion in export earnings so far.
Technical talks on Oct. 21 between officials from OPEC and non-members ended without any discussion of output caps or restoring a target price. Speaking before the forum, Venezuelan President Nicolas Maduro had pledged the country would present evidence on the need to revive prices to $88 per barrel. Iran agrees that OPEC ought to reduce output to engineer a price recovery to $70 as it probably will increase production by 1 million barrels per day if international sanctions are lifted.
Experts doubt OPEC will enact any measures to reduce production and stick to it.
Alex Mills is President of the Texas Alliance of Energy Producers. The opinions expressed are solely of the author. For current regional oil and gas prices, go to www.texasalliance.org.
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