Don’t expect OPEC to brighten Canada’s energy outlook

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Come OPEC meeting time, it's always fun to watch oil-market players sweat as they parse comments by Saudi Arabia's Ali al-Naimi.

The oil minister from the group's most prolific producing nation is famously glib, offering little other than seemingly innocuous statements that leave much to interpretation.

Yet, markets hang on his every word, seeking the faintest of hints into the kingdom's thinking as the Organization of Petroleum Exporting Countries gathers to discuss output policy.

The cartel meets Friday, against the backdrop of severe crude price weakness that began last year when Mr. al-Naimi and his colleagues decided that it was no longer OPEC's job to prop up oil prices by keeping a lid on its supply while other producers pumped crude like it was going out of style.

There is no indication that OPEC will reverse that strategy and lower output quotas to help lift prices this time, despite many of the members' severe economic pain owing to dwindling oil revenues.

So what is the star delegate saying? According to a Bloomberg report from Vienna, he offered this to a question about whether the strategy to protect market share was working: "Who said we are keeping market share strategy? Did I ever say?"

Perhaps not in so many words. But let's face it, OPEC pumps 40 per cent of the world's crude, and it has a big weapon at its disposal – the tap: Dial it back and prices rise, or crank it open and they fall.

Previously employing the former option, the frothy, $100-a-barrel (U.S.) landscape offered non-OPEC members such as the United States and Canada the financial horsepower to develop even the most economically marginal projects. That meant all kinds of competition for the cartel.

Now, with OPEC producing full out, prices have tanked, forcing competitors to slash spending. Production from the group rose in November to 31.77 million barrels a day from the previous month's 31.64 million, according to a Reuters survey. Meanwhile, crude is sloshing in storage tanks and aboard ships around the world.

It's worked: Tens of billions of dollars' worth of Canadian oil sands projects have been shelved over the past year and the rig count in U.S. tight oil regions, such as the Bakken in North Dakota and Eagle Ford in Texas, has been slashed.

A big surprise, and perhaps a key reason that crude remains closer to $40 a barrel than $50, is how long it is taking U.S. production to start retreating as drilling has slowed. When it does, and prices start to recover, there's every indication that producing companies will start drilling and fracking again, knocking the stuffing out of the price.

None of this bodes well for Canada's energy sector. If OPEC extends its current policy, as is widely expected, and there is no quick recovery in demand, some forecasters believe prices could dip below $40. That points to more pain for the industry, which has already shed an estimated 41,000 jobs.

At a business forum in the Rocky Mountains of Alberta last week, Murray Edwards, financier and chairman of Canadian Natural Resources Ltd., said he does not believe conditions will return to the way they were just over a year ago and that only the leanest operators will survive.

This will necessarily mean more consolidation, as companies in tough financial straits run out of options amid falling cash flow and unmanageable debt. Lenders have already lost patience with some companies' inability to meet debt covenants, to the point of pushing them into receivership.

Spending on operations could sink another 20 per cent in 2016, after a 40-per-cent fall this year, the Bank of Canada has said.

Mr. al-Naimi is not expected to make the picture any rosier for Canada's energy industry at this week's OPEC meeting, or even other members of the coterie, including Venezuela and Algeria, that have urged quota cuts to help rescue their revenues.

"We have a meeting on Friday, we will discuss all these issues," he said, according to the Bloomberg report. "We will listen and then decide."

It may well be that they will listen, but the deciding is likely already done.