OPEC surrenders against U.S. shale after 2-year painful price war
That fluttering sound you just heard was OPEC waving the white flag.
After a painful two-year price war against U.S. shale, the Saudi Arabia-led cartel finally blinked this week by agreeing to stop flooding the world with excess supply.
OPEC’s first production cut since 2008 reflects a recognition that hopes of drowning U.S. producers with cheap oil has failed to kill the American oil boom.
In fact, the price collapse crushed the budgets of Saudi Arabia and other OPEC producers, creating financial stress that was unthinkable just years ago.
Moreover, U.S. frackers have emerged from the oil crash stronger and leaner than before. Now they’re positioned to ramp up output at prices that were once too low to survive on.
“OPEC realized they’re facing an impossible battle — and instead has retreated,” said Matt Smith, director of commodity research at Clipper Data.
Ultimately, OPEC decided the financial pain inflicted by the collapse of crude trumped the benefits of continuing to push out producers like the U.S. that tend to need higher prices.
“OPEC hasn’t been able to slay the dragon that is the U.S. shale boom,” Smith said.
Saudi financial stress
While it is true that OPEC’s strategy did slow American oil production, others agree that OPEC’s price war missed its mark.
Saudi Arabia’s market share battle has “turned out to be a failed experiment,” Michael Tran, commodity strategist at RBC Capital markets, wrote in a recent report.
The price war has “left the Kingdom with little to show for its trouble besides burning through a quarter trillion of FX reserves, rising domestic tensions and a deteriorating market share position,” Tran wrote.
Budget stress brought on by cheap oil has forced Saudi Arabia to jack up gas prices and remove other generous subsidies, shelve projects that has cost jobs and contemplate an ambitious diversification of its broader economy.
Another crash in oil prices would have plunged Saudi Arabia further into the red and threatened the IPO of Saudi Aramco, the kingdom’s crown jewel whose debut as a public company could raise $100 billion.