OPEC refuses to cut oil production in oversupplied market

By Kasia Patel
Published: Monday, 21 December 2015

Oil prices to stay lower for longer leaving oilfield mineral prices subdued.

Crude oil futures slumped to their lowest point in nearly seven years in December following a meeting held by the Organization of the Petroleum Exporting Countries (OPEC), which failed to address production rates in an oversupplied market.

Crude prices fell to $38.49 a barrel  on the West Texas Intermediate and below $40 a barrel on the Brent benchmark after OPEC failed to mention a formal production ceiling, which was previously set at 30m barrels a day (bbl/d).

Persistently low oil prices have caused a reduction in the US shale oil sector, with drillers cutting spending and employees.

"This downward trend should accelerate in H2 2015 and H1 2016 given various factors, including stable low oil prices, coupled with a more cautious approach by equity investors who will limit the availability of cash to allow producers to sustain operations," OPEC’s November oil report outlined.

"Hence, the number of newly-drilled wells is decreasing and the number of active drilling rigs has declined by around half," it added.

According to the US Energy Information Administration (EIA), crude oil production by OPEC is an important factor that affects oil prices owing to production targets set for member countries.

"Historically, crude oil prices have seen increases in times when OPEC production targets are reduced," the EIA outlined. 

However, while some OPEC members have pushed for production cuts that might push oil prices up, OPEC’s president and Nigeria’s petroleum minister, Emmanuel Ibe Kachikwu, said following the meeting that a 5% reduction would be unlikely to improve prices unless non-OPEC producers also joined in production cuts.

When questioned about the 30m bbl/d ceiling at a news conference following the meeting, Kachikwu said OPEC would continue at the "current production level".

Oil prices to stay  lower longer

Following the organisation’s decision to forego its formal production ceiling, Reuters reported that investors are predicting that the oil price will stay lower for longer, with US crude futures for delivery nearly 10 years away below $60/bbl.

"Oil is going to make lower lows and lower highs for the foreseeable future and, in terms of market reaction post-OPEC, I’m not surprised but it does leave the door open for prices to fall," Gain Capital analyst, Fawad Razaqzada, told the news service.

With OPEC refusing to budge on production in order to maintain market share, prices for North American shale oil and gas producers are also likely to remain low.

Among the materials used in the extraction of oil and natural gas using the hydraulic fracturing (fracking) and drilling processes are industrial minerals such as barite, bentonite, silica (frac) sand, kaolin and bauxite.

The reduction in capex in the US oil and gas industry has severely impacted demand for oilfield minerals in the last year. While an increase in the number of fracking stages and the re-fracking of old wells has offered some respite, until oil prices lift, demand is unlikely to see a substantial rebound.