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OPEC, U.S. Shale Producer Price War Not Over, Analysts Say

U.S. crude oil prices slumped below $40/bbl on Friday after OPEC sidestepped action to curb output levels, despite a saturated market.

The oil cartel plans to "continue to closely monitor developments in the coming months," but it won't deviate from producing about 31.5 million b/d in the near-term, Secretary General Abdalla Salem El-Badri of Libya said. OPEC's next general meeting is scheduled for June.

If current crude oil output were to remain unchanged, OPEC has estimated that global oversupply in 2016 should be about 700,000 b/d. In October, the cartel estimated that U.S. crude oil and natural gas liquids output in 2016 would decline by close to 100,000 b/d (see Shale DailyOct. 12). The world currently is consuming much less than it is producing.

Energy analysts weighing in following the meeting were pessimistic about the outlook for U.S. oil producers.

Goldman Sachs analysts said the meeting outcome was in line with their view that it's not in OPEC's interest to balance the market in the face of still growing, higher-cost production. Goldman last month maintained a 2016 oil price forecast of $45/bbl West Texas Intermediate, with Brent at $50 (see Daily GPINov. 19). Prices are seen strengthening in the final three months of next year.

"Importantly, our forecast for a late 2016 rebalancing is predicated on a 0.5 million b/d decline in U.S. Lower 48 production, which we believe is not yet on track at the current U.S. oil rig count," said Goldman's Damien Courvalin, Abhisek Banerjee and Raquel Ohana. "As a result, we reiterate our view that prices need to remain 'lower for even longer' for fundamentals to warrant the price increase we forecast late next year."

The price war "likely continues," said Wunderlich Securities Inc. analyst Jason Wangler. Because OPEC production accounts for up to 40% of worldwide output, a decline in supply has to come from non-OPEC sources, i.e., the United States, he said.

"The U.S. is certainly starting to see declines but a quick fix is certainly not in the cards," Wangler said. OPEC apparently is in a "wait and see camp," more than willing to wait out the "weaker sisters/higher cost producers..."

Few domestic producers of any size have tipped their hands yet regarding capital budget plans in the U.S. onshore for 2016. They may have been waiting for more clarity from the OPEC meeting, "but with that now given...the staring contest and onus is now on the U.S. players, in our view."

Frost & Sullivan's Carl Larry, director of business development consulting for oil and gas, said OPEC's decision to hold production steady "was mind over matter. OPEC doesn’t mind that member countries are struggling to meet their budgets nor does the 31.5 million b/d quota really matter."

The reaction in the markets following the meeting "was a sign of disappointment," but the Bureau of Labor Statistics report Friday on U.S. employment was "more of a good reason why we’re seeing prices dipping below $40," Larry said. "Adding another 211,000 jobs to the nation is another sign of confidence that the U.S. Federal Reserve will definitely raise rates later this month. That in turn will cause a rise in the value of the U.S. dollar (USD), and that’s not a good thing for the price of oil that happens to be priced in this currency."

It's adding up to a market where oil prices aren't sensitive to oil supply but to currency strength.

"So in summary, we all must do what OPEC has done," Larry said. "Move on and forget about what they are pumping. They have their agenda and it's right in line with free market capitalism. They have supply, they have consumers and they will keep making money as best they can...On the other hand, America makes a lot more than oil and it’s there that this becomes significant. Without a world that can afford to buy, there will not be much selling."

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