A ship receives its load of oil from the Kinder Morgan Trans Mountain Expansion Project's Westeridge loading dock in Burnaby, British Columbia, Thursday, June 4, 2015.JONATHAN HAYWARD/The Canadian Press
Finally, some good news for the energy sector! OPEC got its act together and agreed on production cuts starting in January and the federal government gave its blessing to the twinning of Kinder Morgan's Trans Mountain pipeline to Vancouver.
Oil prices shot up, share prices of Canadian oil and gas companies jumped and Albertans cheered. Even the loonie gained ground.
I don't want to play the role of the Grinch here but perhaps all the celebration was a tad premature. I expect there may be some disappointments in the months ahead.
Let's start with OPEC's agreement to cut production. If it is implemented as proposed, the member countries will scale back output by 1.2 million barrels a day. Non-OPEC countries have committed to add another 600,000 barrels to that total, with Russia assuming half of that. The combined drop of 1.8 million barrels a day may be enough to eliminate the world's current oversupply situation.
According to the U.S. Energy Information Administration, global oil production in 2017 was expected to average 97.43 million barrels per day, prior to the announcement of the deal. World consumption was estimated at 96.92 million barrels, a difference of 510,000 barrels per day.
Simple math says the cuts will turn that production surplus into a shortfall of almost 1.3 million barrels a day, drawing down reserves and pushing prices higher, which is the end goal of the whole exercise. However, that assumes two things. First, that there will be no cheating among the OPEC countries and the other participants. Based on past history, that is probably wishful thinking.
The second, and potentially greater impact on future price moves is U.S. production. Washington has not committed to any cuts and, with Donald Trump as President, it never will. On the contrary, Mr. Trump is a champion of energy self-sufficiency, which means he will probably encourage idle shale oil producers to get back in the game as oil prices move up.
As we saw last summer, it does not take long to get those rigs back into operation if the price is right. According to The Wall Street Journal, more than 100 rigs went back into production when the oil price briefly rose above $50 a barrel at mid-year. Goldman Sachs is now predicting US$60 a barrel next year. That could ramp up U.S. shale production by several hundred thousand barrels a day, almost offsetting the OPEC strategy.
We'll see how it all plays out next year but the net result could be that oil prices may not rise much higher than their current levels. Anyone looking for a return to US$100 a barrel and the boost that would bring to energy stocks is likely to be disappointed.
Switching to the pipeline decision, Mr. Trudeau's announcement was a gutsy call but implementation is not going to be easy. Kinder Morgan says it wants to start work next year with a view to having the new line operational by 2019. Good luck with that.
Vancouver's mayor adamantly opposes the line and presumably he is speaking for a majority of his city's population. Environmentalists are incensed and some First Nations say it will never happen and plan to resort to the courts.
We could see the project delayed by massive civil disobedience, such as is happening right now in the U.S. at the Standing Rock Sioux Reservation in North Dakota. In what USA Today last week called "the longest-running protest in modern history", thousands of people have camped out in frigid temperatures trying to stop completion of the US$3.8 billion project that would carry crude oil from North Dakota to Illinois. Every attempt at compromise has failed. Finally, over the weekend, the Obama administration caved in and ordered a halt to further construction.
Trans Mountain may become a similar type of flashpoint in Canada, in which case all bets are off on the timing of its completion.
So, yes, the news last week was good for energy producers. But the final chapter on both stories has yet to be written.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.
Gordon Pape