OPEC has decided to let the market dictate oil prices to squeeze out higher-cost producers. But U.S. shale firms, relentlessly striving to improve efficiencies and adopt new technologies, will be able to handle the coming storm, according to energy expert Daniel Yergin.
“We are in unknown waters, in a situation where OPEC and in particular the Gulf states are just saying, let the markets figure out what the price will be. This is a different game,” says Yergin, vice chairman of business-information company IHS and a Pulitzer Prize winner, in an exclusive interview with IBD.
OPEC on Wednesday lowered its forecast for how much oil it will need to provide next year to 28.9 million barrels, under the 30 million barrels a day target the cartel reaffirmed on Thanksgiving Day. Along with new data showing high U.S. stockpiles, crude futures fell $2.88 to $60.94 a barrel, hitting a fresh five-year low. That’s down from $73.70 just before Thanksgiving and over $105 in late July.
Non-OPEC supply, with growth coming from North America shale players and deepwater drilling in Brazil, will jump by 1.36 million barrels a day to 57.31 million barrels a day.
IHS is still forecasting the U.S. to boost its crude production next year, even if the increase isn’t as big as it was in 2014.
“U.S. tight oil producers have continued to go up the learning curve, have continued to become more efficient and have continued to figure out how to drive down costs,” Yergin said. “So there is a lot of entrepreneurial and technical ingenuity at work, even in this lower-price environment.”
The break-even point for shale oil depends on the area and specific part of the play. Newer areas are more expensive because E&Ps haven’t cracked the code for the specific drilling techniques needed.
Continental Resources (NYSE:CLR) said in September it would invest more money per well in the Bakken as it used more sand to further complete each well.
Other techniques that exploration and production companies are employing include spacing fracs tighter together and using hybrid fluids.
“These aren’t new products, they are just new applications,” said David Deckelbaum, a director at KeyBanc Capital Markets.
Most of the innovation is driven by operators who “tinker with completion and experiment with different designs to come up with a better mouse trap.”
Lower oil prices might be the driver to end America’s ban on exporting crude, putting even more pressure on OPEC.
“It becomes even more important to producers not to sell at a huge discount to world prices,” Yergin said. “I think that there is a lot of discussion about the ban and I think 2015 could be the year that it gets lifted in some form.”
On Thursday the House Energy and Commerce Committee will discuss lifting the ban, which was enacted in the 1970s in an effort to shield drivers from OPEC-fueled price spikes.
Citigroup sees the overall marginal costs for existing shale rigs at $40 a barrel and BofA sees $55 as the break-even price for 50% of U.S. producers.
Francisco Blanch, the head of BofA’s commodities research, said OPEC was “effectively dissolved” when it left it up to the market to decide prices.
Yergin believes that OPEC is in its second-biggest crisis after the early 1980s, when oil from Alaska, Mexico and the North Sea flooded the market, collapsing prices, but it’s still early this time around.
Saudi Arabia and Gulf states favored keeping output levels steady last month, showing it fears the mistakes it made in the 1980s.
Back then the Saudis cut production to defend prices. But in the short run other OPEC and non-OPEC countries kept production levels steady, while in the long run the higher prices encouraged new exploration and drilling that boosted supply.
But not all OPEC countries are happy with the decision. Iran, Iraq, Nigeria and Venezuela are the hardest hit by the U.S. shale oil boom.
Venezuela already faces massive economic and fiscal mismanagement by its socialist government. It could be pushed into default if oil prices keep falling, according to Yergin.
“There is a tendency to think of OPEC as a singular mind, but it’s really an association of countries that are very different, that are really only joined together by one thing — they export oil,” he said. “When it’s in their self interest, they will come back together.”
Gulf countries may revisit their decision in three or four months if “they become convinced that other exporters would cut back and not just cheat,” Yergin said.