It was a year ago this week that OPEC met and made a decision that continues to roil the world’s oil markets. Some have called the oil exporters’ refusal to cut production the biggest mistake in the group’s history. It has been estimated that members subsequently lost some $500 billion in revenue, and OPEC’s policy continues to hurt oil producers worldwide as well as investors in oil companies.

To review, oil prices had been falling in the months leading up to OPEC’s November 2014 meeting, and the general consensus was that members would probably agree to cut production in order to balance markets and prop up the price of crude. Instead, they decided to defend market share. OPEC’s rationale was that cutting production would only help shale oil producers grow their market share by allowing them to maintain high margins. So OPEC decided to produce all out, and the drop in oil prices that began in the summer accelerated following that meeting.

Without a doubt OPEC — and more specifically Saudi Arabia, which maintains the biggest influence within the group with over 30% of the cartel’s production — miscalculated. At the time of the meeting, oil prices were still above $70/bbl. OPEC members likely envisioned that oil would drop another $10-$20/bbl as they started to put more crude on the market, and that this would promptly put an end to the U.S. shale oil boom that had added 5 million bpd of new crude capacity over the past five years.

Their decision at the time was defensible, but it was risky. The oil markets were already showing signs of being oversupplied, and crude had already fallen by $30/bbl since summer. What if their move failed to adequately shut in enough shale oil production and instead extended the oil price decline?

In fact, that’s exactly what happened. Oil prices swiftly moved lower and found a floor around $40/bbl. The price would make a move back to $60/bbl, but each time crude has tried to make a run this year it has returned to that floor. So the price impact was much worse than OPEC anticipated.

But worse for OPEC was that shale oil producers became much more efficient. They focused on the sweet spots in the shale plays. They optimized the number of stages and the amount of sand used in horizontal wells. They deeply cut expenses. So, even though most of them continue to operate in the red, they aren’t nearly as deep in the red as one might expect given this year’s average oil price. That means all but the weakest have been able to survive OPEC’s price war. Production has begun to decline, but in order to make a serious dent in U.S. production OPEC might need to absorb another $500 billion hit. But will they?

That’s the big question as OPEC again prepares to meet on Dec. 4. They are now a year into this price war, and many OPEC members have been vocal about making necessary moves to push prices back up to $70/bbl or higher. But Saudi Arabia — the driving force behind this strategy — knows that it will be heavily criticized if the group changes course now. After all, what did their $500 billion blunder gain them? Not much. U.S. shale production has declined modestly, and while it will continue to fall with oil under $50/bbl, any recovery in oil prices is likely to arrest that decline.

I predicted in January that the price of West Texas Intermediate (WTI) would not close this year below $40/bbl. While we did see it briefly below that point, $40 has proven to be a pretty sound floor this year. But crude inventories continue to grow, and the markets will be closely watching the OPEC meeting for guidance of where we go from here. Unless OPEC announces cuts to production quotas — which at this stage would be admitting its strategy hasn’t worked — crude may slip below that $40 floor.

I am keeping a bit of powder dry just in case. Join us at The Energy Strategist to see which stocks are at the top of my year-end shopping list.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

Energy Transfer’s Fast Growth on Sale        

Few midstream businesses are coping with longtime lows in energy prices as well as Energy Transfer Equity (NYSE: ETE). The general partner of master limited partnerships Energy Transfer Partners (NYSE: ETP) and Sunoco Logistics (NYSE: SXL) continues to deliver outstanding distribution growth from increasing claims on the cash flows of these resilient affiliates, even as it finalizes the acquisition of rival Williams (NYSE: WMB) in the biggest industry deal struck during this slump.

ETE recently increased its distribution 37% year-over-year, and in a well received annual analyst day presentation last week projected compounded annual payout growth of 21% for the next two years. Assuming a stagnant unit price, that would push up the annualized yield from the current 6% to nearly 9% two years from now.

Yet despite the strong operating performance and the clear strategic advantages of the pending merger, ETE’s unit price continues to underperform even the increasingly unpopular MLP sector as a whole, as it has since the day it went public with its pursuit of Williams.

Some of that might be attributed to worries about the increasingly precarious finances of leading Williams customer Chesapeake Energy (NYSE: CHK), even though that leveraged oil and gas producer has the resources to withstand another 18 months or so of unprofitable prices before being forced into a distress sale.

The weak market for liquefied natural gas has been another point of concern as Energy Transfer awaits the final green light from partner Royal Dutch Shell (NYSE: RDS-A) for the construction of an LNG export terminal in Louisiana. But while some foreign LNG suppliers have been forced to renegotiate long-term deals that now look too rich, ETE last week began advertising its project as an all-but-done deal, pronouncing itself “highly confident” of achieving the final investment decision next year.

That ought to provide a big boost to Energy Transfer’s valuation, because the commercial agreement for the project as it’s currently written entitles the partnership to a guaranteed rate of return while Shell bears all of the project and market risk.

ETE remains a Buy below the reduced limit of $27 in the Growth Portfolio, as does WMB below the reduced limit of $45. The discount on WMB relative to ETE’s merger offer (and assuming parity between ETE units and the ETC tracking stock it plans to issue as merger consideration) has narrowed to 1.5%, suggesting the market views the completion of the merger as a near-certainty.          

— Igor Greenwald