With West Texas Intermediate (WTI) breaking below $50/bbl early in the New Year, it’s hard to recall that for nearly three years there were few sources of new supply, except North America, that could help offset the geopolitical disruptions in oil supplies from the Middle East, North Africa and elsewhere.

Recent events have cast oil markets in a different light. In a kind of paradox, it was the timely revival of North American production growth that largely prevented world markets from tending to scarcity and markedly higher oil prices. Yet, with the rising contribution from North America, the result has been a glut.

And then there are the actions of OPEC, which T. Boone Pickens asserted in a recent CNBC interview “is not a cartel anymore. It’s a trade association.”

He may be right. Certainly, with the divergent interests of its members, it is increasingly hard to see OPEC acting as a unified body.

In the wake of the Saudi-led decision to let market forces determine the price of crude, Olivier Jakob, managing director with Swiss-based advisory Petromatrix GmbH, offered an acerbic soccer analogy as to its impact on the less wealthy, non-Gulf OPEC members.

“OPEC has scored an own goal,” Jakob told Bloomberg. “Non-Gulf OPEC countries will participate against their will in the supply rebalancing in 2015. Venezuela will fall before the Bakken does.”

And as one Wall Street analyst observed: “If the goal is assumed to have been to put the U.S. industry out of business, there’s a lot of collateral damage that’s also being done elsewhere in the world.”

The Saudi move marked the beginning of two tests in the oil sector. One relates to the price of crude needed to have sustained production growth to meet rising global demand. A second relates to which players will be displaced as the high-cost marginal producers in a new, Darwinian world order.

According to Simmons & Co. International, the threshold price needed to significantly expand U.S. production is a WTI price of $75 to $80/bbl, and to sustain international production it is a Brent price of $85 to $90/bbl. As we go to press, spot prices are as much as $25 to $35/bbl below these levels. The mood is bleak as E&Ps take the ax to capex programs, cutting 20% to 30%, and often more, from prior-year levels.

Oil can still go lower—down to cash costs—but the dramatic slide in price is beginning to defy logic.

As FBR Capital Markets’ managing director, Rehan Rashid, wrote in a report in December, markets appeared to draw “illogical conclusions” regarding the energy space. Put simply, if the collapse in equity prices and widening of spreads in the high-yield markets for energy are correct, appropriately priced capital will not be available to finance the projected growth in U.S. liquids that is putting pressure on crude prices.

Put another way, if the capital markets are correct, the production projected to flood crude markets won’t fully materialize, assuming U.S. production is the swing factor in creating oversupplied conditions for crude. If that’s the case, the process of rebalancing the global market has already started.

Or presenting the conundrum yet another way: If capital markets were crippled, and U.S. shale growth went away, do you think global oil markets would be oversupplied for other than the very short term?

Meanwhile, the question arises as to which producers will be left standing in the period pending a recovery in crude. Analysts indicate non-North American participants may have been, surprisingly, less informed as to the marked improvement in economics achieved in unconventional plays, believing the U.S. was at the high end of the cost curve and still produced the “marginal barrel.” But with improved techniques, and now lower costs, the U.S. has moved closer to the middle of the global cost curve.

So while U.S. shale may remain a target of the Saudis’ more market-share-driven policies, a Simmons report recently noted there were also high-cost prospects globally that were “being incinerated thanks to the Saudi blowtorch.” These will, of course, also play a part in rebalancing global markets, although the collateral damage will tend to take longer to show up than their North American cash-flow-driven counterparts. (See “Second-Half Hopes” in this issue for a graphic of non-OPEC major project delays and cancellations totaling 1.6 MMbbl/d.)

Only time will tell who are the winners and losers. Let the competition begin.

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