LONDON (Reuters) - Oil hit four-year lows around $70 a barrel on Thursday and commodity currencies were sent tumbling, as OPEC resisted the temptation to cut back production following the more than 30 percent plunge in prices since June.
Asked whether the oil producer group, which provides around a third of world supply, had decided not to reduce production, Saudi Arabian Oil Minister Ali al-Naimi told reporters: "That is right."
The meeting had lasted over five hours and as the decision emerged both Brent and U.S. crude prices were sent sliding as traders saw it as sign that OPEC members were effectively now in price war with each other.
Brent dropped to $71.58 and U.S. crude sank to $68.20 a barrel as both headed for $5 drops on the day, their biggest falls since May 2011. [O/R]
"Oil prices are now completely in the hands of the market," Dominic Chirichella, director of New York-based Energy Management Institute, told Reuters Global Oil Forum.
Europe's stock markets extended their gains on the day to 0.25 percent as the prospect of cheaper energy costs for both firms and strapped consumers added to Wednesday's signals from the European Central Bank that it is edging closer to government bond buying.
The case for ECB action had been underlined earlier as Spain and Germany both reported weaker-than-expected inflation figures. It points to another decline in the overall euro zone reading when it is published on Friday.
Lending to euro zone households and companies also fell again.
Speaking in Finland, ECB head Mario Draghi said the euro zone needs a "comprehensive strategy" including reforms by governments to get it back on track. Last week, Draghi in effect backed U.S.-style quantitative easing.
The comments and the data lowered the euro to $1.2463 and triggered a new set of record-low bond yields for the euro zone's biggest economies, with France's 10-year yields dropping below 1 percent for the first time.
Most market action, however, centered on the slide in oil.
Oil-rich Norway's crown hit a three-week trough of 8.6530 crowns per euro, Russia's rouble took another dive and Nigeria's naira continued to fall despite an 8 percent devaluation on Tuesday.
The huge slump in oil prices since June had made OPEC's meeting its most closely watched in decades. One member of the cartel told Reuters it will next meet in June.
Besides pushing down inflation in Europe, already close to deflation, the fall in prices is also hurting the economies, currencies and financial markets of many producer countries.
Ehsan Ul-Haq, a senior oil market consultant at KBC Energy Economics, in Vienna for the OPEC meeting, said he expected oil prices to now stay under $80 a barrel for the foreseeable future with a chance they could go below $70.
While the plunge in prices is bad for oil producing countries, it is generally viewed as a positive for global growth as it makes energy cheaper giving consumers more money to spend and reducing costs for firms.
Earlier, MSCI's broadest index of Asia-Pacific shares outside Japan advanced 0.3 percent. Shanghai shares hit a three-year high, extending a rally that began after China cut interest rates last week. They are up 8.2 percent so far this month.
"The rate cut clearly showed the Chinese authorities are very much keen to support the economy. So even though Chinese economic data has been pretty weak, investors are convinced that there will be no hard landing," said Naoki Tashiro, the president of TS China Research.
Japan's Nikkei shed 0.8 percent as the yen recovered some ground against the dollar. The index has gained 5.1 percent so far this month, becoming the second-best performing market in the region after China.
Though trading was lighter than usual due to the Thanksgiving holiday in the United States, the dollar crept up as it fetched 117.54 yen, off last week's seven-year high of 118.98 yen, but still up more broadly.
It also saw gold, which is priced in dollars, dip for a second session as it held below $1,200 an ounce.
Outflows resumed from the top bullion exchange-traded fund, while a referendum in Switzerland on Sunday also kept the market cautious: a "yes" vote would force the Swiss central bank to buy about 1,500 tonnes of gold in coming years, analysts said.
(Addtional reporting by Hideyuki Sano in Tokyo; Editing by Andrew Roche)
I think an article I read mentioned 15% but it also noted a similar one month drop several months ago. Short term variances occur regularly. The drilling machine does not brake quickly. It can take months for a change in operating strategy to be clearly demonstrated. Most of the rigs running now in all the plays are under contract. A lot of those contracts require the payment of a day rate whether the rig is drilling or stacked. For that reason abrupt changes are rare. What we will likely see from most operators is drilling contracts will expire and not be renewed until the company is down to the targeted number of rigs they wish to operate under the new price regime. It could take months. Once wells are drilled and cased however operators may choose to delay completion. Half of horizontal well cost is usually completion related. Operators also may choose to complete wells but delay turning them to sales to help drop supply.
Another issue is the timing of the price drop. This is the time of year that E&P companies set the budget for next year, and with all the uncertainty about oil prices, many companies are going to slash their official drilling budget for 2015. If prices rise or cost drop, they can always increase the budget or rigs in the 2nd half of 2015. In late January during earnings season, we will get a lot of official company announcements about 2015 plans.
Going forward it will be more important to have the lowest completed well cost, instead of the fastest production growth, so companies may change their drilling programs to include more and larger pad drilling and delay certain well operations to create volume discounts.
Debunking Popular Oil Price Myths
Oil prices are driven primarily by two factors: (1) international supply and demand for oil, which remains the lifeblood of the modern industrial economy, and (2) the value of the dollar, the currency in which oil is priced.
Haaretz investigation: Secret flight operating between Israel and Gulf state
Here's another article which seems to confirm the oil price drop as quantitative easing,
revaluation, economic stimulation package:
It's actually pretty straight forward business sense but that's not nearly as controversial to write about as all the conspiracy angles. Emphasis added is my own.
Saudi Arabia says won't cut oil output
reuters.com 9:49am EST December 21, 2014 By Rania El Gamal and Maha El Dahan
ABU DHABI (Reuters) - Saudi Arabia said on Sunday it would not cut output to prop up oil markets even if non-OPEC nations did so, in one of the toughest signals yet that the world's top petroleum exporter plans to ride out the market's biggest slump in years.
Referring to countries outside of the Organization of the Petroleum Exporting Countries (OPEC), Saudi Oil Minister Ali al-Naimi told reporters: "If they want to cut production they are welcome: We are not going to cut, certainly Saudi Arabia is not going to cut."
He added he was "100 percent not pleased" with prices but they would improve, although it was unclear when.
He blamed the fall in prices to half their levels of six months ago on speculators and what he called a lack of cooperation from non-OPEC producers.
His remarks at a conference in Abu Dhabi marked the second time in three days that the kingdom has signaled that it would not alter output levels, preferring to allow the market to stabilize on its own.
The determined tone of his comments was echoed by some other Arab oil ministers at the conference in the United Arab Emirates (UAE) capital.
UAE Oil Minister Suhail Bin Mohammed al-Mazroui urged all of the world's producers not to raise their oil output next year, saying this would quickly steady prices. He did not elaborate.
The world is forecast to need less OPEC oil in 2015 because of a rising supply of U.S. shale oil and other competing sources, with no significant increase in world demand growth.
Kuwaiti Oil Minister Ali al-Omair said OPEC did not need to cut production and would not hold an emergency meeting ahead of its next scheduled talks in June.
"I don't think we need to cut. We gave a chance to others (and) they were not willing to do so," he said, referring to contacts with non-OPEC producers before OPEC's meeting in November in Vienna.
There, OPEC kept its target output of 30 million barrels per day (bpd) unchanged, leaving the market to balance itself without the group's intervention.
That stance was seen as a shift from a longstanding policy in which OPEC powerhouse Saudi Arabia has acted as a swing supplier.
Asked about possible cooperation between members of OPEC, which include the world's lowest-cost producers, and non-member countries, Naimi replied: "The best thing for everybody is to let the most efficient producers produce".
He also said that OPEC's decision would ultimately help the world economy. "Current prices do not encourage investment in any form of energy, but they stimulate global economic growth, leading ultimately to an increase in global demand and a slowdown in the growth of supplies," he said.
Iraq's oil minister, Adel Abdel Mahdi, said he saw no need for an OPEC emergency meeting but "we have to wait and see" whether the group was right to keep output unchanged.
Naimi denied politics played a role in the kingdom's oil policy and said the price fall would not have "a noticeable and big" impact on Saudi Arabia or other Arab economies.
The market slide has triggered conspiracy theories, ranging from the Saudis seeking to curb the U.S. oil boom, to Riyadh looking to undermine Iran and Russia for their support of Syria.
Before the Vienna meeting, there were hints that Russia could cut output or exports if OPEC did the same. But the message from Moscow after the meeting was that the world's second largest oil exporter would maintain its output.
One of the interesting things here:
1. Even though it might be good for pricing, neither the federal or state governments will move to directly curtail US production.
2. Further, US law is set up to prevent oil companies from colluding on pricing/output.
Taken together, these things keep the US from responding to cut production, and indeed, probably prevent us from directly bargaining with OPEC. On the flip side, if I'm a low cost producer in the US, I'm looking at all the new business opportunities opening up to me.
Why should we expect OPEC countries to cut production in a coordinated fashion when we largely can't?
I agree, dbob, although I would say Saudi Arabia has no need to cut production without other OPEC countries agreeing to do likewise. There are certainly a number of other OPEC members in difficult straits.
US shale producers have the best supply control in history to match demand and support pricing in the form of unconventional reserves. To restrict supply simply slow drilling and/or delay completions. This strategy is available to energy companies that are not highly leveraged and it will be interesting to see if and how they may use it. Energy companies with high debt have to maintain cash flow even if they have mature assets that do not require drilling to hold leases. Energy companies in emerging plays still in lease capture mode, many of whom are also highly leveraged, are in dire straits if the price of crude remains depressed for longer than six months.
Since 1.3M of the ~2.0M barrels the US imports per month comes from Canada, the global crude market is largely outside of the influence of domestic North American production no matter what US operators may do. The US imports about 4% of global production. The battle is for market share overseas.
IMO, the decline in crude will slow US investment and stimulate a modest decrease in supply over time but the longer term impact will be M&A activity with majors and financially healthy mid-majors picking up proven and probable unconventional reserves from over leveraged operating companies caught between falling prices and the inability to secure additional financing.
Saudi Oil Minister Ali al-Naimi to reporters: He blamed the fall in prices to half their levels of six months ago on speculators and what he called a lack of cooperation from non-OPEC producers.
I ran into a quote on this very topic yesterday, suggests that 40% of BOE was going to the futures marketing, speculators. Here's the quote:
"DH the real one not the squatter on Dec 14, 10:42 AM said:
OPEC was never in control; at least for the past decade. HFT of commodity contracts created a HFT premium. CME Rule 575 destroyed HFT commodity trading for the purpose of price manipulation. Prices were weaker before Rule 575 was implemented mid Sept 2014 and collapsed afterward. The $40 or so difference was the HFT premium paid to financial innovators. Not to buyers. Not to sellers. Not to traditional speculators. It was the equivalent of a street tax that was just removed. Prices today reflect actual economic activity, with probably a little crash effect from buyers of contracts a few months ago who thought prices would remain high forever. They're panic sellers now."
Read more: http://www.businessinsider.com/r-opecs-badri-says-oil-price-drop-be...
Will High Frequency Trading Force a Market Redesign?