OPEC’s high output, high price days dwindle

* Smooth meeting belies tough decisions ahead

* U.S. shale creates price versus market share dilemma

* Echoes of 1980s non-OPEC supply surge

* Secretary general decision postponed

OPEC’s halcyon days of high prices and high production may be drawing to a close as soaring U.S. output opens a new era for world oil markets.

After a comfortable ride since the 2008 price crash and record revenue of $1 trillion last year, it may have to be more pro-active on output policy.

The rise of U.S. shale oil and slack demand will eventually force OPEC either to support oil at $100 a barrel by cutting output – offering higher price support to rival producers – or protect market share by keeping the taps open and allowing prices to fall.

The Organization of the Petroleum Exporting Countries’ Friday meeting was content to simply agree, as expected, to retain the group’s 30 million barrels per day (bpd) output target through the rest of the year.

It will meet again on Dec. 4. Ministers also agreed to set up a committee to investigate the impact of shale.

Oil is just above the $100 level favoured by the group that pumps a third of the world’s oil. OPEC’s leading producer Saudi Arabia says the world oil market is in “good shape”.

For now, maybe. But OPEC has little room to pump more due to the U.S. oil boom that has shifted the existing competition for marketshare once and for all to Asia and intensified a rivalry between OPEC’s top two producers Saudi Arabia and Iraq there.

Core Gulf producers think OPEC will still be able to pump at least 30 million bpd, provided U.S. shale grows at a moderate pace. While that does not leave much room for growth, it implies that OPEC will not need to scale back significantly.

“This is not the first time new sources of oil are discovered, don’t forget history,” said the influential Saudi Oil Minister Ali al-Naimi. “There was oil from the North Sea and Brazil, so why is there so much talk about shale oil now?”

There has not been such a surge in flows from outside OPEC in decades and that has rung the alarm with some members – particularly Nigeria and Algeria – that feel squeezed.

“The rapid ramp up in U.S. shale bears a striking resemblance to the situation in the early 1980s when North Sea oil production from the UK and Norway was rising very quickly,”

said Neil Atkinson, director of energy research at Datamonitor.

“This presented OPEC with an enormous challenge because at the time demand growth was very weak. Nobody’s saying that will happen again, but all the ingredients in that brew are starting to come into place.”

Oil above $100 has freed vast quantities of U.S. shale oil in North Dakota and Texas that helped boost U.S. output by 850,000 bpd by the end of 2012.

That is more than each of OPEC’s two smallest producers, Qatar and Ecuador pump in total. Light, low sulphur shale poses no threat to OPEC’s Gulf members that sell heavier crude – but is a headache for Nigeria and Algeria, which produce oil of similar quality.

The surge may even push the United States closer to the Saudi mindset, thinking more like a producer than a consumer keen to keep oil cheap.

LEVELS OF PRICE PAIN

Last year’s surge in U.S. output came with a hefty price tag as the rush to produce drove the cost of pumping marginal crude to $114 a barrel, according to a Bernstein Research report.

While Riyadh welcomes the rise of U.S. shale, the Saudi oil minister himself has said the kingdom would be lucky to go beyond current production rates of about 9 million bpd by 2020 due to new global supplies.

But during that period, Iraq’s production will have doubled from current rates of around 3 million bpd, if all goes to plan – a concern for Riyadh.

At some stage, Saudi Arabia may decide to open the taps to shut in the marginal barrel and make Iraq feel some pain, said analysts. The kingdom has done this before – early last decade it let the price fall to punish non-OPEC producers. There are no signs of that now.

Oil at $70-$80 could start to impact the economics of some shale oil plays. Iraq’s breakeven budget price is well above $100 a barrel.

With no pressure on its budget, analysts say Saudi Arabia could easily pump 8 million bpd at $80 without breaking sweat. After pumping 10 million bpd with oil at $110 last year and 9 million bpd with oil at $110 this year, it has built up formidable financial reserves.

Analysts’ estimates for Saudi Arabia’s break-even oil price this year vary from around $65 a barrel to $85, depending on projections for its spending.

“For Saudi Arabia, there’s plenty of room on the downside in terms of price and quantity before they start to panic,” said Yasser Elguindi of Medley Global Advisors.

“North Dakota will cut before anyone in OPEC if oil falls to $70.”

Others in OPEC – including Iran, whose revenue has been sunk by Western sanctions directed against its nuclear programme, Iraq and Algeria – need oil well into triple digits to balance budgets.

This may lead them to call on Saudi Arabia to cut supply in order to support prices. But Riyadh may be thinking counter-intuitively.

“Saudi Arabia’s challenge will be to convince Nigeria and Algeria that higher prices will encourage the economics (of U.S. shale) that are their undoing,” said Elguindi.

The group will choose its next secretary general when it meets again in December, said the Saudi oil minister. The issue has stalled on competing candidates from Iran, Iraq and Saudi Arabia. Friday’s meeting continued to adjust the criteria for prospective candidates to come forward

Reuters