OPEC failed to agree on production cuts at today’s meeting in Vienna. The biggest winners of this outcome are U.S. consumers, who will continue to free up more cash for discretionary spending thanks to lower energy bills.
So far this year, it is only Saudi Arabia that has cut production, and we had believed there were good odds that the Saudis would be able to enforce production cuts among the cartel member states at this meeting. In retrospect, it was too optimistic to expect such swift action. This was the first ordinary meeting of OPEC members since June – at that meeting, brent prices were above $110 per barrel.
Member states are perhaps not panicking yet, but cohesion among the group will no doubt increase as prices plummet. Declining global oil prices will hit the weakest member states, and probably long before there are major dislocations in U.S. shale. The oil price required for many OPEC countries to fund fiscal programs is higher than the estimated average breakeven costs of U.S. shale projects: in the time it would take OPEC to find the price level that produces a meaningful slow-down in U.S. shale development, there is a non-trivial probability that weaker OPEC member states would collapse. In other words, member states will blink first.
Still, for as long as the oversupply of energy lasts, it will be good news for U.S. consumers who benefit most from weak energy prices. Emerging Asian equities will also benefit relative to EM peers.