Oil prices fell again over the weekend after the Organisation of the Petroleum Exporting Countries confirmed it plans to maintain its production near record highs despite depressed prices, as OPEC continued to guard its share of an oversupplied market.
The producer group failed to agree on a new production quota, allowing member countries to continue pumping more than 31 million barrels per day of oil, further swelling a global glut that has depressed oil prices since Summer 2014.
OPEC’s announcement sent ripples through wider markets and dented shares of U.S. energy drillers already suffering from low prices, but losses in oil futures were limited as prices hit support around $40 a barrel.
Brent crude oil futures LCOc1 fell 84 cents, or nearly 2%, to settle at $43, after rising in early trade. The benchmark was within cents of August’ s six-year low.
Saudi Arabia has been under pressure from OPEC’s poorer members to cut output to bolster prices, which have dropped from over $100 a barrel since June 2014. But Saudi Arabia has been content to keep production up, which has squeezed profits for producers in non-OPEC countries, including the United States.
“The heavy pressure on non-OPEC producers, especially U.S. shale, is going to be kept up,” said Paul Horsnell, head of commodities research at Standard Chartered.
George Johnson, executive advisor in KPMG’s oil & gas practice, commented: “This OPEC meeting will have far reaching consequences for global oil markets.
“A failure to curb production will extend the supply overhang and could see Brent crude oil sink below $40-barrel – adding further pressure to the fiscal budgets of oil producing countries, whilst inflicting further misery on the upstream industry as a whole.
“Despite depressed oil prices, OPEC’s track record of meeting the 30/mbpd quota over the last 12 months has been poor, with both Saudi Arabia and Iraq enjoying periods of record-breaking production.
“The group will need to address the increase in Iranian production once sanctions are lifted in early 2016. Cooperation among OPEC members is critical. If the Iranian situation is handled poorly, and both camps (OPEC and Iran) operate independently, we could see further price erosion.”
Mark Andrews, UK Head of oil & gas at KPMG, added:
“With ‘lower for longer’ becoming the industry consensus on oil pricing, the willingness, and ability, of companies to continue to operate marginal fields is reducing.
“In some instances, this will result in earlier than anticipated cessation of production and the acceleration of the associated decommissioning burden. The impact could be a domino effect, raising the very real possibility of significant resources being left in the ground, as the cost of maintaining ageing infrastructure mounts for certain mature, late life assets that remain active.
“From an M&A perspective, a prolonged lower oil price has produced some clarity for future pricing, and narrowed the valuation gap between buyer and seller price expectations Those with cashflow constraints or debt burdens that require refinancing are concluding that weathering the storm of low prices may not be possible for the length of time now forecast.
“They are now considering M&A at valuations closer to those of buyers, who have until recently kept their powder dry. As the gap in valuations closes, we expect an increase in deal flow across the sector.”