- This is the script of CNBC's news report for China's CCTV on December 3, Thursday.
Welcome to CNBC Business Daily, I'm Qian Chen.
OPEC's plan to shake up the world oil market may have backfired for now.
Just a year ago, the Organization of the Petroleum Exporting Countries decided to let market forces determine the price of oil, rather than its own production quotas.
Conventional thinking then was that the U.S. oil patch would be littered with bankruptcies, and production would collapse.
As for Russia, the world's largest energy producer would be forced to cut back production by hundreds of thousands of barrels this year due to both the weakness in oil prices and the impact of Western financial sanctions.
But the results have turned out very different. Instead of falling off, production increased from where it was last year, and the world is still swimming in oil. The three biggest producers - Russia, the United States and Saudi Arabia - have in fact been adding more than 1 million barrels a day more to the market in the past year.
To deal with the new reality of persistently cheap oil, Saudi Arabia has been tapping the debt market, issuing bonds for the first time in seven years to help cover budget shortfalls. Analysts say they expect Saudi Arabia to continue issuing debt, and the sense in the kingdom seems to be that it's better policy to issue debt when it can be done, than when it is really needed.
Russia, meanwhile, has surprised the market on several fronts, managing to keep production growing for now even with super-low prices.
"The Russian view is they will pump as much oil as they can all of the time and deal with the financial consequences after," said Chris Weafer, senior founding partner at Eurasia consulting firm Macro-Advisory. "They will never voluntarily cut production or reduce supply in order to manage oil prices.
That is simply not going to happen." As in the U.S., Russia's oil producers have improved efficiency by using new technologies to improve production for some of their old wells. But Russia has been hampered in developing new Arctic, deep-water or shale projects because of the financial sanctions placed on it by the West after it invaded Ukraine.
"They've been forced to deleverage across the board," Weafer said. But because the companies are becoming more efficient, he does not anticipate a big drop in oil production.
But another factor has kicked in as well, and that has proven the key for Russian production. The Russian central bank's policy of letting the ruble float with oil prices has helped keep costs down.
Russia's success with letting its currency devalue seems to be in part behind the speculation that Saudi Arabia and other Gulf producers could seek to de-peg their currencies from the U.S. dollar. But analysts do not see a high likelihood of that for now.
Now, let's take a look at the US. There have been bankruptcies, and indebted companies are expected to increasingly have trouble getting financing.
Unlike other producing countries, the U.S. has no state ownership of oil companies, and the industry is a collection of hundreds of companies large and small that can produce oil at an estimated cost of $30 to $60 per barrel, compared with $10 of Saudi and $20 of Russia.
Citigroup estimates that production costs for shale producers will fall by 25 to 30 percent through 2016 and offshore costs will fall slightly less. But even with cheaper costs and greater efficiency, the industry has been feeling the pinch.
The worst could be ahead for the U.S. industry if oil prices stay low. For one, financing could become a problem, particularly for companies with high-yield or "junk"-rated debt. Analysts say it's becoming clear that some companies did not hedge in the derivatives market against such a steep and long-lasting downturn in oil prices.Hedges roll off in Q1. When they get to Q2, they'll have more naked exposure to the oil price.
According to Reuters, Saudi Arabia will propose a deal to balance oil markets, including demands on OPEC members Iran and Iraq to limit production growth as well as an involvement of non-OPEC producers like Russia, Energy Intelligence reported.
CNBC's Qian Chen, reporting from Singapore.