OPEC is set for a showdown as Saudi Arabia is seen resisting calls to reduce production even as oil slides deeper into a bear market, according to the energy analyst and Pulitzer Prize-winning author, Daniel Yergin.
Saudi Arabia, the group’s biggest crude exporter, doesn’t want to be the first producer responding to price fluctuations and will be reluctant to shoulder the bulk of any output cuts, said the vice-chairman of IHS Inc., an Englewood, Colorado-based consultant. The Organization of Petroleum Exporting Countries is pumping more oil than its official target of 30 million barrels a day, a Bloomberg survey shows. Some members may face a budget crisis should prices fall further, according to Yergin.
“There’s going to be a classic brouhaha in OPEC about cutting,” he said in an interview at Bloomberg’s Singapore office Friday. “Everybody will have their own saga as to why they should only cut from a more theoretical level, and I don’t think the Saudis are going to buy into that.”
Crude prices have collapsed more than 20 percent from their June peak, meeting a common definition of a bear market. Global supplies are rising as a shale boom spurs U.S. production to the highest level in more than three decades.
OPEC, which is responsible for about 40 percent of the world’s crude supply, raised output to 30.974 million barrels a day in October, a 14-month high, led by gains in Iraq, Saudi Arabia and Libya, according to the Bloomberg survey of producers, oil companies and analysts.
Brent crude, the benchmark grade for half the world’s oil, traded at about $86 a barrel in London Friday. Futures are set for the biggest monthly drop since May 2012 amid speculation OPEC will maintain quotas that were first set in January 2012. The group is scheduled to meet Nov. 27 in Vienna.
“OPEC may simply roll over,” said Yergin, the author of “The Prize,” a history of the oil industry that won the Pulitzer Prize in 1992. “What would make a difference is if you saw another leg down in prices. That would create pressure.”
Amid the speculation over OPEC policy, the United States is in a position to become the global swing oil producer, Yergin said. Output surged to 8.97 million barrels a day through Oct. 24, the fastest pace in weekly data going back to January 1983, according to the Energy Information Administration.
“The U.S. is headed to a situation where it may well overtake both Saudi Arabia and Russia as the largest producer,” he said. “There’s a tendency both to ascribe too much power to OPEC or to write their obituary. OPEC only represents about one- third of world oil production, so they’re not the dominant force in themselves.”
Producers of tight oil from shale rock formations will suffer first from crude’s collapse because they need higher prices to keep supplying profitably, said OPEC’s Secretary- General Abdalla El-Badri. About half of current shale output will be curbed if oil remains at present prices, he said in London on Oct. 29.
Whether that’s true depends on the “responsiveness” of tight oil to price fluctuations, according to Yergin.
“The evidence so far is that most of this is going to be resilient at these low prices,” he said. “You won’t have as fast a growth, you’ll have some companies that will have financial problems, people will be somewhat more cautious. But if you’re in a sweet spot, you can make this work.”