OPEC is running out of options.
The price of crude has plummeted 13% in recent weeks to below $46, suggesting that the cartel’s efforts to vanquish cheap oil are falling short.
OPEC and other major producers had been enjoying higher prices since agreeing in November to slash production, a strategy designed to rid global markets of excess supply.
Now, the magic appears to be wearing off.
The cartel has responded to the sharp decline in prices by suggesting that cuts could be extended far beyond their original mid-year deadline.
“I am confident the agreement will be extended into the second half of the year and possibly beyond,” Saudi energy minister Khalid Al-Falih said Monday, according to Reuters.
But with American producers increasing production, extending the freeze may not be enough to stabilize prices or send them higher.
Energy ministers from OPEC members are set to meet on May 25. Here’s a look at their options:
Extend the cuts
OPEC and other major producers agreed to production cuts only after prices dropped as low as $26 in 2016. Getting all the major players on the same page took months of negotiation.
For a while, the strategy appeared to be working, with prices drifted north of $54 earlier this year. That’s right in the cartel’s sweet spot of $50 to $60 per barrel — just high enough for OPEC countries to budget comfortably, but low enough to keep other key producers on the sidelines.
The cartel has a new problem, however — and one that it cannot easily control: American shale producers.
U.S. oil producers have returned to the market with force, doubling the number of rigs in operation over the past year. Years of low prices have forced them to become much more efficient.
Analysts at UBS estimate that U.S. producers can now make money as long as prices remain above $40 per barrel. That’s down from $65 in early 2014.