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Following last Thursday’s announcement by OPEC that the cartel would maintain its present oil production levels, prices of West Texas Intermediate (WTI) crude closed at $66.15 per barrel on Friday. In early trading Monday, the U.S. benchmark hit a low of $63.72 per barrel.  But as trading continued, WTI climbed back to $67.65 and held in the $67.50 range in subsequent morning trading.

Brent crude fell to a low of $70.15 on Friday, slipping to $67.59 then recovering to $71.51 in early trading on Monday. The European benchmark was trading around $71 per barrel mid-morning, U.S. time.

But OPEC’s decision to continue production and export levels brings geopolitical risk to its members, according to some experts. “If the governments aren’t able to spend to keep the kids off the streets they will go back to the streets, and we could start to see political disruption and upheaval,” Paul Stevens, distinguished fellow for energy, environment and resources at Chatham House in London, told Bloomberg. “The majority of members of OPEC need well over $100 a barrel to balance their budgets. If they start cutting expenditure, this is likely to cause problems,” Stevens said.

The International Monetary Fund (IMF) says that Kuwait, Qatar and the United Arab Emirates can break even at $70 a barrel, whereas Iran needs $136, and Venezuela and Nigeria need $120.

Non-OPEC members are shuffling the cards as well. Russia needs $101 per barrel to break even, the IMF report said. “Russia has already lost almost $90 billion of its currency reserves this year, equal to 4.5 percent of its economy, as it tried to prevent the ruble from tumbling after Western countries imposed sanctions to punish Russian meddling in Ukraine. The ruble is down 35 percent against the dollar since June,” Bloomberg reported.

Daniel Yergin, Vice Chairman of IHS Inc., wrote an op-ed for the Wall Street Journal yesterday entitled “The Global Shakeout From Plunging Oil; new supply—rather than demand—is dominating the market, and OPEC has been caught by surprise.” In his article Mr. Yergin attributes the new paradigm in global oil to U.S. and Canadian producers:  “…the surge in U.S. oil production, bolstered by additional new supply from Canada, is decisive. This surge is on a scale that most oil exporters had not anticipated. The turmoil in prices, with spasmodic plunges over the past few days, will likely continue. … If prices remain close to their current level, OPEC members will likely come together again to reassess the market…,” Yergin believes.

Falling Prices Good for China, but some OPEC Members Show Concern

As news of OPECs decision not to cut production sent oil prices down yet again, China stands poised to take advantage of the situation. The nation’s efforts to boost reserves may increase its imports by as much as 700,000 BOPD in 2015, according to London-based Energy Aspects Ltd., reports Bloomberg. That is more than half the global glut forecast by Citigroup Inc. after OPEC refrained from cutting output at its meeting last week.

“This is a golden time window to acquire more strategic oil stockpiles at lower costs,” Gordon Kwan, the Hong Kong based head of regional oil and gas research at Nomura Holdings Inc., wrote in an email November 28. China will be “a big beneficiary” from the OPEC decision, he said.

Even as China looks to benefit from low global oil prices, OPEC’s own members voice deep concerns over the current levels of production. Iran’s Oil Minister Bijan Namdar Zanganeh said the “shock therapy” of a steep drop in crude prices is no solution for OPEC’s loss of market share to U.S. shale producers, reports Bloomberg.

Prices at this lower level are no guarantee of a significant reduction in U.S. shale output, Zanganeh said in an interview in Tehran on November 28. “High prices are a disadvantage to OPEC’s market share. If you want to increase your share, you have to reduce prices, but you can’t do it through ‘shock therapy’ over the course of three months if you want to change everything.”

Last week, CIBC’s Katherine Spector, head of commodities strategy at CIBC World Markets, spoke to Oil & Gas 360® about some of the possible outcomes from the pending OPEC meeting. Today Spector discussed OPEC’s decision to maintain production levels with Mark  Crumpton on Bloomberg’s Bottom Line.

At the time of posting, WTI is trading at $68.56; Brent at $72.24.

Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.

Analyst Commentary

Raymond James:
“We mostly had expected in advance that Friday would be a rough day for energy, but we didn't think it would be THIS bad. A particularly steep plunge in oil prices in response to OPEC's (rather unsurprising) decision, combined with lots of U.S. investors out of the office, led to a near-total absence of buyers stepping in. The result: one of the roughest one-day selloffs in energy stocks that anyone has ever seen (and yes, that includes the financial crisis).”

Baird:
“Risk trading lower while crude mounts reversal from overnight lows. S&P 500 futures are trading down 10 points or 0.5%, pulled lower by weak international equity trading overnight, driven, in part, by soft European PMI data. WTI has rebounded from overnight low at $63.72/bbl to now trade up 0.3% at $66.38/bbl while Brent has experienced a similar intraday rebound, moving from a nadir at $67.53/bbl overnight to rally back to near unchanged at $70.00/bbl. U.S. Treasuries are trading firmly with the 10-year rate now at 2.16%, near October’s lows. Perhaps the most notable macro action overnight comes from the Russian ruble, which has weakened 4.6% today against the U.S. dollar, trading 51.74 last, underscoring the increasingly difficult macro- economic outlook for the country amid crude’s malaise.”  

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.