OPEC decision zaps prices, energy stocks
U.S. crude plunges 10% to $66.15 a barrel
The decision by OPEC this week to maintain current levels of oil production caused crude prices to tumble Friday and hammered the shares of major energy companies in the U.S. and abroad.
A barrel of benchmark U.S. crude, which cost well above $100 as recently as June, had fallen to about $73 earlier this week, leading many energy experts to expect the Organization of the Petroleum Exporting Countries, which met Thursday in Vienna, to act to halt the slide.
OPEC’s announcement that it would maintain its collective output target at 30 million barrels a day had an immediate effect.
The price of benchmark U.S. crude tumbled 10 percent Friday to settle at $66.15 a barrel.
An accelerating crash in crude-oil prices will probably push the world’s largest oil companies to scrap investments or slow production in America’s shale fields as CEOs protect dividend payments, analysts said Friday.
Large energy companies including Chevron Corp., Conoco-Phillips, Exxon Mobil Corp. and Marathon Oil Corp. saw share prices fall about 4 percent Friday. Britain’s BP PLC fell 6 percent.
The pain being felt by energy producers is proving to be a bonus for consumers as prices fall at the pump, giving people more spending mon--
ey and lowering costs for many businesses.
Cheap energy has already been cited for lifting the spirits on Main Street as people spend less on gasoline and put more goodies into their shopping bags.
Also riding high are the airlines, package delivery services and cruise lines, which are spending less on fuel. Delta Air Lines rose 4 percent before the opening bell Friday, as did United Continental Holdings Inc. and American Airlines Group Inc.
Partly because of the shale oil boom in the U.S., the world is awash in oil at a time when demand from major economies is weak — so prices are falling. Citibank analysts wrote in a report Thursday that global supplies exceed demand by about 700,000 barrels a day now.
Tom Kloza, chief oil analyst at the Oil Price Information Service, expects the price of oil to fall by another $5 or $10 a barrel before stopping. “It’s that kind of rout,” he said.
West Texas Intermediate crude for January delivery fell $7.54, or 10 percent, to $66.15 on the New York Mercantile Exchange, compared with the Wednesday close. That’s the lowest settlement since September 2009. Brent crude for January settlement fell $2.43, or 3.3 percent, to $70.15 a barrel on the London-based ICE Futures Europe exchange, the lowest close since May 2010.
Overall, the slide is a boon for consumers in oil-importing regions such as Asia, Europe and North America.
The U.S. economy will receive an outsize benefit from lower oil prices because the U.S. is the world’s largest oil consumer.
U.S. consumers have been surprised and delighted at the lowest gasoline prices since 2010. Drivers in some low-cost states such as South Carolina, Missouri, Oklahoma and Texas could see prices below $2, according to Kloza.
The average price of a gallon of regular grade gasoline Friday in Arkansas was $2.62, according to auto club AAA. The national average was $2.79.
Kloza expects gas to eventually be a full $1 per gallon below its June peak of about $3.70 a gallon. That would save typical households $60 a month for those that burn 60 gallons of fuel.
“It’s a nice easy, calculation,” Kloza said. “These are numbers that we would have regarded three or four months ago as something from the lunatic fringe.”
The bottom should come between $2.50 and $2.70 a gallon, Kloza said.
The oil companies propelling a production boom in Canada and the U.S. won’t be so happy. Crude produced in Canadian oil sands, deep offshore in the Gulf of Mexico and in some U.S. onshore shale formations is some of the most expensive oil to produce in the world.
Drillers will have to cut back at least some activity. Forcing this kind of slowdown may have been part of OPEC’s motivation for declining to cut its own production.
The parts of the industry most exposed to cutbacks include certain U.S. shale deposits, where break-even costs vary from $40 to more than $100 a barrel. While some, such as Russian oil tycoon Leonid Fedun, say the slump will halt a good deal of production, others argue that the shale industry will be able to maintain production for some time at current price levels.
In the longer term, the greater dilemma for oil producers is that even as crude drops the costs of developing new reserves remain higher than ever. An extended period of lower prices will prevent companies from being able to replace production as existing fields dwindle. In ensuring investors get paid, companies may have to sacrifice growth.
Tumbling shares prices are a concern to investors who worry that companies including Royal Dutch Shell Plc and BP Plc won’t have enough cash to cover both investment plans and dividends.
“What we are about to see is a knife taken to non-OPEC industry [capital expenditures],” analysts an Bernstein Research led by Oswald Clint said in a note Friday. “It’s painful, but yields remain payable.”
Information for this article was contributed by The Associated Press and by Jillian Ward, Mikael Holter and Moming Zhou of Bloomberg News.