The group that controls about 40 per cent of the market has showed signs of fraying.
Since January 2012, members have exceeded the daily production ceiling of 30 million barrels by an average of 886,000 barrels, according to data compiled by Bloomberg. Following Opec's decision not to trim output at its November meeting in Vienna, some countries have even less incentive to comply. Opec's own demand forecast is the lowest in 12 years and more than 1 million barrels a day below its current production target.
Prices are lower than what all Opec members except Kuwait and Qatar need to balance their budgets, according to data compiled by Bloomberg. Still, Saudi Arabia, the group's largest member, has led the opposition to reducing output and continues to question the need. The kingdom has enough reserves to win a price war, but at great cost to itself and other Opec members, according to Citigroup Inc.
"Opec has a very hard time maintaining the cartel," said Jeffrey Rosenberg, chief investment strategist for BlackRock Advisors. "Everybody has an incentive to boost up their quantity to maintain their revenue."
Traders and analysts interpreted Saudi Arabia's decision to let prices fall as a challenge to higher-cost US shale producers. At least a dozen "tight oil" companies have cut spending plans, executives said on conference calls. The US Energy Information Administration reduced its production forecast. Genscape Inc. expects a more severe impact, with output slipping from its three-decade high. Energy companies have led losses among US equities and bonds, with some investors raising concerns that the damage could spread. Others are preparing to take advantage of distress and consolidation.
"We're all fascinated to see what the real economics of tight oil are as prices go down," said Paul Horsnell, head of commodities research at Standard Chartered in London.
Sagging demand from weak economic growth in Europe and Asia helped push oil into a bear market. Lower prices could help stimulate the market, according to Citigroup and Goldman Sachs Group Inc.
The International Energy Agency expects oil consumption to rise by 900,000 barrels a day in 2015, up from a 700,000-barrel-a-day increase in 2014. Still, gasoline demand is flat in the US, where cars are getting more fuel-efficient and young urbanites are riding public transportation.
"Efficiencies are permanent demand reductions that are not going to come back because prices are lower," said Tamar Essner, an energy analyst at Nasdaq. "The big driver of demand-related headlines has been Chinese growth and Europe slowing, all of which is true, but I don't foresee enough of an uptick to alter the price dynamic."
Lower prices are fuelling the debate over the 40-year ban on most exports of unrefined US oil. Producers want access to higher overseas prices, while refiners want to keep their cost advantage. Those shipments that are permitted are already surging, and the US would probably export as much as 1.5 million barrels a day if the law changed, EIA Administrator Adam Sieminski told a House subcommittee on December 11. The issue could gain prominence in the new Republican-led Congress, especially as Senator Lisa Murkowski of Alaska, the ban's most outspoken opponent, takes over the upper chamber's natural resources committee.
In June, with violence spreading in Ukraine and Islamic State warriors threatening Baghdad, analysts were wondering how much higher the international benchmark price would rise past US$114 a barrel. Let's just say those people have adjusted their thinking. Now the question is how much US$60 a barrel will strain already unstable countries.
Venezuela, struggling with inflation and capital flight, faces soaring borrowing costs as investors weigh the risk of default. Libyan output almost quadrupled between April and October as fighting eased, only to drop 32 per cent last month. Iraq's production is close to a 13-year high as the country struck a deal with its semi-autonomous Kurdish region to sell more oil as they wage war against Islamic State insurgents.
If Iran agrees to restrain its nuclear programme in exchange for relief from Western sanctions, the Persian Gulf country said it aims to almost double output to 4.8 million barrels a day, an oil ministry official said.
In Russia, the combined force of United States and European sanctions over the annexation of Crimea and the plunging value of its biggest export have triggered a recession, a currency crisis and runaway inflation. "Geopolitical risk is definitely one of the downsides of low oil prices," said Brian Youngberg, an energy analyst at Edward D. Jones & Co.
- Bloomberg
