Briefing highlights
- Canada could seize OPEC market share
Canada could grab market share
Canadian, U.S. and Norwegian oil producers could soon play a little market share game of their own.
The historic weekend agreement among OPEC and 11 non-OPEC players to cut production has put energy companies in those three countries in a position to do just that.
“The fact that the U.S., Canada, Norway and others adding up to about 40 per cent of world oil production are excluded from the agreement leaves them free to step in and take market share away from the signatories to the agreement,” said Bank of Nova Scotia economist Derek Holt.
“This could occur just as the new incoming U.S. administration may move toward relaxing restrictions on fracking, expedites pipeline approvals, and provides energy investment incentives,” he added in a report on the OPEC-led deal.
“Note that the U.S. rig count has risen from a low of 404 back in May to 623 as of last week. That is still a far cry below the nearly 2,000 rigs that were deployed until late 2014, but it signals that U.S. supply interest is coming back. Canadian rigs are also coming back from a low of 36 back in May to 230 last week versus the 430 range in late 2014.”
OPEC nations had already agreed to cut 1.2 million barrels a day in a bid to buoy crude prices, starting next year. Then, on the weekend, they brought to the table other producers that pledged to trim 558,000 barrels a day of their own. The combined cuts could bring down supply by about 2 per cent.
What’s more, Saudi oil minister Khalid al-Falih said his powerhouse country could go even further, promising to “cut, and cut substantially, to be below the level that we have committed to on Nov. 30.”
Together, the weekend deal and the Saudi minister’s comments sparked a surge in crude prices Monday.
As The Globe and Mail’s Shawn McCarthy and Jeffrey Jones report, they also lit a fire under shares of Canadian oil companies.
And as crude prices climbed, so, too, did oil-linked currencies such as the Canadian dollar, which topped 76 cents (U.S.).
Mr. al-Falih’s comments, which surprised the markets, “suggests a willingness to go below 10 million barrels per day for the first time since February, 2015, after a Saudi production surge added about one million barrels per day from December, 2014, through to the peak this past summer,” Mr. Holt said.
“Instead of viewing this as a sudden epiphany with respect to the role of supply in driving prices, perhaps one of the fresher considerations following the U.S. election results is that the Saudis expect the U.S. to reintroduce sanctions against Iran, and so they are stepping back from the prior focus upon market share ambitions that marked their stance against cuts earlier in the year.”
Remember, the Saudis had abandoned price support in their quest for market share.
Now, the tables could turn.
“Canada and the U.S. could grab market share away from other producers by continuing to set out along the path toward continental energy self-sufficiency and by exporting more energy production,” Mr. Holt said later.
“Such goals were stymied by the collapse in oil prices and thwarted both by a lack of progress on pipelines and toward lifting U.S. energy export restrictions. The improvement in prices is beginning to bring back some of the idled drilling rigs in both countries while a more industry-friendly regulatory approach could reinforce the effects.”
Elsa Lignos, a senior Royal Bank of Canada currency strategist, said attention will now turn to whether those who struck the deal will live up to their promises.
She agreed that attention will also now focus on “the response of producers not covered by the pacts (countries that pump 60 per cent of the world’s oil are included but major producers like the U.S., Canada and Norway are missing).”
Many observers question whether the OPEC and non-OPEC countries will stick to the agreement, given lax attention to quotas in the past. But it is worth noting that this overall deal, which could cut world production by about 2 per cent in 2017, includes a monitoring committee.
“This is significantly more than we, or the market, had been expecting prior to last month’s meeting,” said Tom Pugh of Capital Economics, referring to the planned 2-per-cent reduction and the original Nov. 30 OPEC promise.
“In addition, Saudi Arabia said that it will cut production by more than it pledged to at the last OPEC meeting. The Kingdom has also reportedly notified some of its clients that they will receive less oil from January, which has boosted hopes that OPEC will actually follow through on its commitment to reduce output.”
He added, though, that he is “skeptical,” both because OPEC and Russia have a lousy track record, and because American shale producers will probably up their game given the rise in oil prices.
“In summary, this agreement is significant and could expedite the market rebalancing that we expect to raise prices to $60 by end-2017,” Mr. Pugh said.
“However, we doubt that supply will be reduced by the full amount, and even if it is, higher output from the U.S. is likely to at least partially compensate.”
BMO Nesbitt Burns senior economist Benjamin Reitzes agreed, suggesting that before markets get “all bulled up” about recent developments, they should remember that the surge in U.S. shale output helped drive down prices in the first place.
“Lower prices prompted big cutbacks in the shale patch (and elsewhere), but the rebound in prices from early-year lows was already driving increased drilling activity and (delayed a quarter or two) increased production,” Mr. Reitzes said.
“The latest run-up in oil prices is bound to push drilling activity, and production, higher still as we move into 2017. So, while the oil market looks like it will be better balanced next year, don’t expect prices to consistently press higher as plentiful shale production will act as a dampener.”