Houston’s economic health hinges on what OPEC does later this month.
Three years ago on Sunday, U.S. crude prices tumbled below $75 a barrel, a psychological threshold that marked the difference between profits and losses for many of Houston’s oil companies.
It was the lowest price since 2010, down from more than $107 a barrel just a few months earlier, but analysts were still convinced that the oil prices were about to hit bottom. A week later, at a closely watched OPEC meeting, Saudi officials would refuse to cut production to stop the oil market’s plunge because they knew shale drillers would keep pumping and elbow them out of key markets.
The cartel split between Saudi Arabia and those who wanted the kingdom to single-handedly fix falling oil prices. The Saudis didn’t. Barrel prices plunged, into the $60s, the $50s, the $40s, the $30s, and finally into the $20s early last year. More than 200 North American oil producers and energy services companies went bankrupt. Houston, the U.S. energy capital, lost 77,000 oil jobs.
At the moment, most analysts believe OPEC and the non-OPEC countries that agreed to curb crude production in November and December of 2016 will stay the course when they gather in Vienna in two weeks. But unless the cartel does something drastic, crude prices will probably languish closer to $50 a barrel than $60 a barrel next year, even if OPEC decides to extend its current production caps through 2018, analysts say.
It’s pretty simple, actually. If OPEC keeps its current production cuts through next year, oil will sit around $50 a barrel; if it defies expectations and slashes more output than expected – say, another 1 million barrels a day – crude prices could rise into the $60-a-barrel range and stay there. But if the cartel decides it is tired of restraining itself while the rest of the world pumps oil and grabs market share, crude prices could easily slip into the $40-a-barrel range, said Michael Wittner, an oil market analyst at French bank Société Générale.
Wittner’s analysis is a downer in what has been a upbeat couple of weeks for industry. On Nov. 6, the price had closed above $57 a barrel, its highest point in two years, after reports of a power struggle in the Saudi royal family. At the end of last week, oil was still holding above $55 a barrel.
But those prices may not last long without a swift boost from OPEC. The International Energy Agency, the Paris-based group that advises oil-importing nations, said the recent increase in crude prices is mostly based on temporary supply disruptions and other transitory market movers, like geopolitical tensions in the Middle East, including Saudi Crown Prince Mohammed bin Salman’s purge of top Saudi officials and princes.
The agency cut its demand outlook for next year by 190,000 barrels a day. Global crude production, it said, could vault above demand by 600,000 barrels a day in the first quarter of 2018 and by 200,000 barrels a day in the second quarter.
“Next year’s demand growth will struggle to match this,” the agency said. “This is why, absent any geopolitical premium, we may not have seen a ‘new normal’ for oil prices.”
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