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Oil prices fall further as defiant OPEC seeks to hurt US producers

Crude oil prices since

Crude oil prices since 2005 (Source: NASDAQ)

Crude oil prices sunk to a new $72-a-barrel low on Friday following a controversial decision by the Organisation of Petroleum Exporting Countries (OPEC) to maintain current production in a bid to undermine production from the United States-a non-OPEC member whose shale oil has been flooding the market.

A meeting of the powerful 12-member cartel in Vienna last Thursday chose to let the oil prices continue to slide by maintaining its daily production at 30 million barrels in order to hurt the profitability of American shale oil producers.

“We will produce 30 million barrels a day for the next 6 months, and we will watch to see how the market behaves,” said OPEC Secretary-General Abdalla El-Badri after the meeting.

OPEC’s dominance of the global oil market has been shrinking due to rising supply of shale oil mainly from the United States thanks to hydraulic fracturing or fracking technology, a process in which water, sand and chemicals are shot underground to free oil and gas trapped in shale rock.

Although fracking has enabled countries to boost their production from previously inaccessible reserves, it is very expensive, yielding smaller profit margins compared to conventional oil production methods. Lower crude prices inevitably strike shale producers hardest, making it less attractive to start new drilling projects.

Fracking has lifted the United States to the world’s biggest oil producer this year, overtaking Saudi Arabia and Russia, with daily output exceeding 11 million barrels.

Some OPEC members including Nigeria, Algeria, Venezuela and Iran had drawn their 2015 national budgets based on an oil price of around $ 100 per barrel and hence declining prices will have a huge impact on them.

The decision is mainly backed by Saudi Arabia, which, despite needing oil prices to be at least $104 per barrel in order to balance its budget, is desperate to maintain the cartel’s long-standing market share in the face of new shale producers.

OPEC produces 40 percent of the world’s oil today, 13% less than it did in 1976.

Declining crude prices is not welcome news to new African producers as they will be increasingly looking to oil to finance their budgets.

In a recent interview, Total E&P’s General Manager in Uganda, François Rafin, expressed concern over the falling prices.

“We need to cut our production costs on the barrels we will produce in the future because crude oil is now at $80.  We need to bring the cost down so that we stay competitive in an environment where the oil price is low,” he told Oil in Uganda.

Share prices of major oil companies have already taken a beating following the Vienna meeting, with Royal Dutch Shell PLC down 4.3%, Total SA to 4.1% and BP down 2.7%.

Report by Chris Musiime