OPEC may be trying to cause pain for the U.S. shale drillers, but it's providing a holiday gift for consumers, with another 25-cent drop in gasoline prices possible by Christmas.
Oil plunged Friday, with West Texas Intermediate down 10 percent to $66.15 per barrel, after OPEC refrained from cutting back production at its Thursday meeting. Gasoline at the pump, meanwhile, was at $2.79 per gallon nationally, its lowest Thanksgiving holiday price since 2009.
"I think the national average will drop to between $2.55 and $2.60 a gallon by Christmas," said Andrew Lipow, president of Lipow Oil Associates. The national average was $2.79 per gallon of unleaded on Friday, down 4 cents from last week, according to AAA.
OPEC members Thursday followed the lead of Saudi Arabia, which has said it did not want to cut production and has made it clear it will defend its market share against other producers.
Those producers include the U.S. shale industry, which has helped boost U.S. production by a million barrels a day in just a year. OPEC member Venezuela sees the world oversupplied by 2 million barrels a day.
Lipow said one surprise might be that U.S. oil production will continue to increase. "I expect oil production is going to continue to increase in the U.S. over the next three to four months as shale oil and Gulf of Mexico projects that are underway get completed," he said. Drilling in the Rocky Mountains, Utah and Ohio will be the first to be impacted, he said.
U.S. oil production has averaged about 9 million barrels a day over the last several weeks, the first time it has been at that level since 1986. Oil prices are expected to continue to be under pressure.
"It's still expected that Gulf of Mexico production will increase by 500,000 barrels a day over the next two years, and that's very likely to happen because most of the investment has been spent," Lipow said.
Oil stocks were hit hard Friday, with the S&P energy sector down more than 6 percent.
"Eighty percent of the production coming on stream from tight oil has an economic return between $50 and $69. At this price level, tight oil will be tested. People have committed for rigs in the short term, but every management is going to go back and review their budgets and we'll see spending reined in further," said Daniel Yergin, vice chairman of IHS. They'll focus on the most productive wells ... spending will be concentrated in the most productive plays."
He noted that many of the quarterly reports from oil companies indicated that they were going ahead with drilling plans but that will change.
"No matter what OPEC does in the months ahead, this has changed the psychology of investing in the world oil industry," Yergin said.
Lipow said the U.S. industry would cut back on existing wells, even though it will continue to see production growth over the next couple of months even with low prices.
"Is the break even $70 or is it $50? There's no doubt the E and P companies will be cutting their budgets dramatically," Lipow said.