UK 17:13 Friday, 23 October 2026
Breaking news and expert analysis on fast-moving AIM and LSE listed shares
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
It’s been coming for the last four months, but on Thursday OPEC finally declared open war on the US “Shale Revolution”. Yesterday, Chris Oil felt this might present a short term buying opportunity in AIM oil-stocks. I disagree. OPEC’s failure to cut production and the accompanying statement it released are clear signals of intent. The Organisation of Petroleum Exporting Companies, despite intense internal pressure from some of its members, has set itself on a course to crush the highly leveraged “fracking boom”. There is almost certainly going to be a lot of collateral damage, not least among AIM’s oil exploration and production sector, which is so reliant on external funding for survival.
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Comments
BananaBob
Ben
It’s a game of 2 half’s. If the Saudi’s continue to bank roll terrorism, which they are, then the Yanks will fuck them up big time by fair means or fair. It’s all about giving ya dog enough leash!
Steve
Good article – I was not expecting OPEC to let Brent slip sub $80, but it has done and it looks likely it will slide sub 70 and stay there for much if not all of 2015. If it does so it is going to have some big consequences.
XEL looks vulnerable as this could well impact timelines for Bentley again which it cannot really afford. Caza has expanded in the Permian through significant debt and had just turned operationally cash flow positive but still requires further funding.
It does create opportunities though – longer term this should rebalance supply and demand and so oil should move up again in late 2015 and into 2016. As I posted on the other post Amerisur has a strong balance sheet, good growth prospects and remains cash flow positive at around $40 per barrel, so can comfortably ride out an extended period of lower prices.
wildrides
You doom monger Ben …………. OPEC did not take ANY action to reduce oil price at the recent meeting . It merely decided to do nothing with regard to capping current member output . Contrary to what you say many commentators predicted this (in ) action would come to pass , and it has . The recent drop is just a knee jerk reaction . OPEC will soon call an emergency meeting if they think they need to introduce a production cap . However such an action is very likely to be totally ineffective in re balancing the oil supply and demand because of elastic supply else where . OPEC power has diminished in these current times and they recognise it ………….. that is the real story behind the inaction.
Paul Curtis
But
1. AIM Oils already discounting considerable bad news. Those that are well funded look compelling medium term value.
2. OPEC well aware that too much carnage would result in severe future supply shortfall, causing sharp spike in oil price and destroying economic recovery. They have limited spare capacity to prevent this. If the US Shale junk bond bubble implodes the consequences could be devastating. OPEC treading a tight rope.
3. OPEC expected to be posturing. Do they ever say what they mean!
4. Six months ago how many analysts forecast $70 oil Q4 2014? None!
5. Only thing we can best certain of is best cure for low oil price is low price.
Ben Turney
@wildrides – Inaction was an action. The expectation/hope was for a 1.5million barrel cut. Before this week, the speculation was this would happen, then the price did start dropping prior to the meeting. OPEC’s “diminished” power still accounts for just over a third of total daily production (according to the figures released by OPEC and the BP Statistical Review of World Energy 2014 – http://www.energytrendsinsider.com/2014/07/10/world-sets-new-oil-production-and-consumption-records/ )
It is fashionable to talk about OPEC’s diminished power, but this is only in comparison to the incredibly strong position it was in 20 years ago. This organisation still is the power to be reckoned with.
Two points worth remembering. First OPEC’s richer (and more prolific) members are sitting of vast reserves of financial assets (not including oil reserves). Second, the per barrel costs of oil extraction in many countries are far lower than many of their competitors.
Much is said about Russia’s emergence as a major power, but I wonder how badly Russian capacity is going to be hurt by <$70 oil. As for the fracking boom it is literally on borrowed time.
Politically, Thursday’s inaction by OPEC ran into severe internal opposition among other OPEC member countries. I think it would be a mistake to misinterpret this as not being significant or indicative of Saudi determination for a prolonged price war.
Finally, there is sentiment to consider. In the simplest terms why would people buy oil stocks, if the price of oil is falling. Look what happened to many of the gold minnows that shed >90% of their value over the last few years. Many oil stocks are already down but it wouldn’t be a huge shock if we see a similar massacre in this sector.
Maybe I am being a doom monger, but if OPEC want to put a floor under the price, it would have done so this week. Instead it kicked the legs from under oil.
Ben Turney
@Paul – that’s the point. I don’t believe this was posturing by OPEC. The political price was too great.
I take your point about what analysts predicted 6 months ago, but how many contrarians were caught out by gold at c.$1,550 at the start of 2013?
Bad news might be priced in, but what about oil sub $60/$50 or even $40?
Does anyone seriously believe oil could trade again at $40 during H1 next year?
I have a hard time believing that, but will watch any recovery rally closely. If that fails, where might support be?
Questions, questions, questions!
Daniel Victor
OPEC are playing hardball with the US shale oil producers.What they are saying,in effect,is ‘we can produce oil more cheaply than you can,so don’t expect us to make life any easier for you by cutting production and giving you a share of our market !
kingoldby
Assuming oil prices soften, this is good news for general economic growth and it weakens Russia which might help restraint its adventurism in Eastern Europe. Since Britain’s oil production is falling sharply a lower oil price is a good thing all round for us.
Paul Curtis
Have you seen pages 2 and 4 Sun Tel Business Section?
Imo issue is what does OPEC want to achieve.
1. Plan A is frighten market for a few months, dump oil down to nearer $60 and then hold emergency OPEC meeting Feb/Mar 2015. Enough damage caused – all projects requiring > $80 oil on indefinite hold, funding costs of US Shale greatly increased and availability of funding reduced. Oil price gently recovers as supply decreases a bit and demand recovers since cheap oil will stimulate economic recovery. Say $80 oil mid 2015 rising to $100 2016. Job done.
2. Plan B is the current market/analyst view and imo insane. OPEC to wipe out high cost and US Shale with 2 year $60 price war.
Please, seriously consider the consequences of such action,
A sharp drop in future production is guaranteed. Companies would not just mothball high cost projects but would defer lower cost. They would focus on cash flow, not investment. This would cause catastrophic future shortages.
Furthermore the US Junk Debt bubble could explode rather than deflate. Nobody fully understands the consequences of this. Again potentially catastrophic since, thanks to 60 -75% year 1 define rates US Shale production could fall off a cliff. And the funding fallout throughout the industry.
Finally political risk/civil unrest from cash strapped producers unable to fund social costs.
Controlling oil price is like steering an oil tanker. A long time between cause and effect. OPEC must be very careful they don’t screw up future supply, causing > $150 and plunging us all into recession.
My view is their end game not world domination, it’s stable $100 oil.
Jason
Falling oil price will boost economic growth in other sectors and individual’s spending power. Economic growth in turn increases demand for commodities which result starts pushing oil price up. A year of pain perhaps but it’ll go full circle soon enough.
In the meantime avoid non-profitable, high opex, high debt oilers particularly on AIM & wider FTSE indexes and look for bargains on decent ones.
Ben Turney
@Daniel – OPEC is playing hard ball and is following up with serious action. Judging by this morning’s market reaction, it looks like reality is dawning this is the beginning of a serious price war.
@kingoldby – I can’t see the drop delivering anything other than a marginal increase in economic activity. It will also fuel deflation.
@Paul – I think you’ve missed the significance of this being a price war, directed squarely at regaining market share. OPEC doesn’t make its decisions on the basis of what is good for everyone else, but rather what is in the interests of its members. Your analysis supposes the opposite. I doubt very much the oil producing nations are too concerned about future shortages (which they will meet), but care a lot more about driving the shale producers out of business. Thursday was about a lot more than mere posturing.
@Jason – At some point there will be an incredible buying opportunity. Obviously we need to see how things play out, but H2 next year would be my best guess at the moment