Experts Say U.S. And OPEC Share a Common Need: Higher Oil Prices

OPEC needs higher prices to ward off widespread social unrest. File Image / Pixabay

It could be argued that U.S. president Donald Trump and American motorists favour the current drop in crude prices, but while Americans may be getting a break at the pump, experts say cheap oil is proving to be a problem for two entities: U.S. shale producers, and the Organization of the Petroleum Exporting Countries (OPEC).

Tom Kloza, global head of energy analysis at fuel price service OPIS, told CNBC that "When you get down below $40 a barrel in the Permian, you are talking about a potential recession in a sector that you probably never ever thought might be prone to a recession in 2019."

He was referring to the notion that at $40 per barrel, U.S. crude is selling for less than the cost of developing new wells.

Plus, a lack of enough pipelines in the region to bring new supply to market has caused Midland, Texas crude grade to trade at about $7.60 below benchmark West Texas Intermediate, and Kloza noted, "Those are really weak numbers, and they're not very good for people who had debt in the Permian Basin as well as operations there. 

"If you're producer that drilled a long time ago and has some mature assets and doesn't owe any money to private equity, it's not that big of a deal - but they're not real happy about it."

Francisco Blanch, head of global commodity and derivatives research at Bank of America Merrill Lynch, agreed, and he added that "I think the lower prices are going to encourage some of the players in shale to reduce their budgets, and I think some of the weaker hands will probably cut them even deeper."

Moreover, "If we stay at these levels around $50 a barrel WTI, we're going to grow sub-1 million barrels per day," Blanch said.

As for OPEC, Bloomberg pointed out that oil's plunge "has taken prices below the level all but one OPEC country needs to square their 2019 budgets, increasing the risk of supply disruptions from economic dislocation and social unrest."

The news agency went on to remind readers that only uber-wealthy and sparsely populated Kuwait will be able to make ends meets next year; OPEC giants Saudi Arabia, Iraq, and Iran need much higher prices, [and] so do the nations that have suffered disruptions in the past when prices have fallen: Libya, Venezuela, and Nigeria."

Kloza and Blanch's remarks about the vulnerability of the U.S. are in sharp contrast to what Stephen Brennock, oil analyst at PVM Oil Associates, had to say about the Americans earlier this week: "The fact is that U.S. tight oil supply is expected to expand by at least 1 million bpd in 2019, and in doing so it will go a long way to cementing America's newfound position as the world's biggest oil producer."