Marking the first occurrence since 2010, the price of West Texas Intermediate (WTI) crude dropped below $70 per barrel after the international cartel of oil producers – Organization of the Petroleum Exporting Countries (OPEC) – decided against an oil production cut. In the meeting at the Austrian capital of Vienna on Thanksgiving Day, OPEC members concluded that they will peg their output level at 30 million barrels per day as decided on Dec 2011.

How OPEC’s Decision Hit Crude Price?

The WTI crude has been trading significantly below the $100 per barrel level since August this year. This is primarily owing to booming North American shale supplies in the face of lackluster demand expectations, sluggish growth in China and the prevailing softness in European economy. Moreover, a stronger dollar made the greenback-priced crude dearer for investors holding foreign currency.

Amid the weak oil pricing scenario, most investors were expecting output cut from OPEC as the move could have arrested declining crude prices. However, the OPEC’s decision to maintain oil production at current levels has further dragged down oil prices.

Why Did OPEC Decide Against Crude Production Cut?

Post the Vienna meeting, OPEC members concluded that their decision against production cut is not meant to affect the economy. The members believe that oil producers will be able to generate decent income even at such low crude prices and can also invest out of savings to satisfy future demand. Notably, OPEC members account for almost 40% of the gross global crude production, as per the U.S. Energy Information Administration (EIA).

Among the 12 OPEC members, Saudi Arabia holds the top spot in terms of total production. The country had already taken its stand against production cut and had announced this publicly before the meeting in Vienna. Though around 90% of Saudi Arabia’s revenues are earned through crude, it is favorably positioned to handle the commodity at the current price levels.

Although the outcome of the meeting looks positive for the wealthy OPEC members like Saudi Arabia, it pressurizes the OPEC countries like Venezuela, Nigeria and Iran as they are highly dependent on the commodity to fund their government budgets.

Saudi Arabia vs U.S.

Owing to the North American shale revolution, the shale oil industry has been on the rise in U.S over the last few years. However, the cost of producing this particular crude is relatively expensive. Moreover, the life span of shale oil well is considerably short and the production from these wells is also comparatively tougher without a regular flow of investment.  

Hence, we believe that the vote against the production cut might be a strategic move by Saudi Arabia to win an edge over U.S.  

Eventually, with greenback-priced crude below $70 per barrel, it will be harder for U.S. shale producers to earn sufficient earnings to sustain in the industry.

Upstream Energy Companies in Focus

The business of exploration and production firms is positively correlated with crude prices as the players generate revenue directly from selling crude to refiners and downstream players. Hence, with the commodity price remaining significantly low, the upstream energy companies will certainly get affected.

Meanwhile, energy investors will be closely tracking S&P components including Apache Corp. (APA - Analyst Report), Noble Energy Inc. (NBL - Analyst Report), Murphy Oil Corp. (MUR - Analyst Report), Pioneer Natural Resources Co. (PXD - Analyst Report), as well as small caps like Miller Energy Resources Inc. (MILL - Snapshot Report), Sanchez Energy Corp. (SN - Snapshot Report) and Forest Oil Corp. (FST -Analyst Report). We expect shares of these companies to take a beating today as U.S. markets reopen after their Thanksgiving holiday.

Bottom Line

The decision against production cut by the OPEC members has added to the market woes related to the oversupply of crude. Moreover, with weak global demand we do not foresee any immediate rise in oil price.

But we are sure that the market will not allow the commodity price to remain low for ever as it is the invisible hand that will determine the right price of the commodity in the long run.