By Gordon Pape, Editor and Publisher
Beginning of the end?
It could be – and I stress the word ‘could’ – the beginning of the end for the oil price war that has so devastated the Alberta economy and, by extension, that of Canada.
Last week’s OPEC agreement to modestly cut production is tentative and vulnerable to collapse before it is even implemented. The member countries of the trade cartel have to agree on how the cuts will be distributed and no one wants their ox to be the one that’s gored. A meeting scheduled for Nov. 30 to decide on quotas could break down in disarray.
Iran wants to restore its production to pre-sanctions levels. Iraq needs to ramp up output to support its sagging government and fund its military. Venezuela is a basket case and its desperate administration doesn’t want to cede one barrel of output. Saudi Arabia, OPEC’s lynchpin and the prime instigator of the price war that began in 2014, doesn’t want to surrender a single fraction of its share of the global market.
So there’s going to be a lot of rough infighting leading up to that Nov. 30 meeting. No wonder some commentators are already predicted the whole deal will flounder on the details.
That may happen. But the fact that OPEC has even agreed to talk about production cuts is a huge step forward in restoring the oil price to more sustainable levels. Weak demand growth and unconstrained production have left the world awash in the black liquid.
Storage tanks are nearing capacity – the U.S. Energy Information Administration (EIA) reported in late June that storage utilization in the key centre of Cushing, Oklahoma had reached 87%. On Sept. 28, the agency said the U.S. had 502.7 million barrels of crude in storage, an historically high level for this time of year.
How much crude is there?
In other parts of the world, such as Singapore, fleets of tankers are being used to store surplus oil. Thomson Reuters reported in July that 23 tankers with the capacity to hold 43 million barrels of oil had been anchored for a month or more in the Singapore Straits.
It’s impossible to know exactly how much crude is in storage worldwide because key countries like Russia and China don’t release those numbers. But the International Energy Agency estimated the total inventory in OECD countries increased by 32.5 million barrels in August alone.
Faced with those numbers, OECD members were looking at a further drop in oil prices, perhaps to below US$40 a barrel, unless they acted. It appears that even Saudi Arabia, which had been adamant in prolonging the price war to protect market share, was forced to back off.
The impact on Canada was immediate. The loonie jumped by almost a cent after the story broke, again proving that the world continues to see it as a Petro-Currency. The S&P/TSX Capped Energy Index gained more than 5% after the agreement was announced on Wednesday and continued to move higher on Thursday and Friday. Shares in Suncor (TSX, NYSE: SU) closed at $34.18 on Tuesday; by the close on Friday they had gained 6.5% to $36.42.
What does it mean?
All this may be premature. Some energy analysts note that even if the deal does go through the cutbacks may not be sufficient to drive the oil price much higher in the face of weakening demand growth. The whole situation remains in a state of flux.
But as RBC commented in its Daily Global Insight on Thursday, “the improved prospect of an output cut should at least put a floor underneath oil prices, providing support for resource-linked currencies (such as the Canadian and Australia dollars) and energy stocks”.
The bottom line is that it appears the main instigators of the price war have come to the conclusion they are fighting a losing battle and need to change strategies. That’s the first step in restoring prosperity to an embattled industry.