North American output surge poses fresh challenge

Members may rethink strategy

As Canadian and U.S. oil producers continue to raise production and benefit from higher crude prices, a new report suggests OPEC members have nearly met their targets to dramatically curb oil supplies.

The Paris-based International Energy Agency said in its latest monthly oil report that OPEC had collectively lowered it’s production by one million barrels per day in January, or about 90 per cent of its target.

The group agreed to cut production by 1.2 million bpd in November 2016.

Saudi Arabia, which led discussions between OPEC and non- OPEC countries to curb supplies, reduced output by 470,000 bpd between December and January — “appearing to cut by more than required,” the IEA said.

News of the cuts lifted oil prices Friday, with prices for benchmark West Texas Intermediate surpassing US$54. Prices for Brent were trading above US$56 at midday.

The OPEC cuts come as production elsewhere — particularly in the U.S. — edges upward, causing some observers to question how much room is left for prices to continue rising. Analysts say continued production growth could cause OPEC members to rethink the current strategy.

The IEA said it expects “significant increases in production in, for example, Brazil, Canada and the U.S. whose combined output is expected to grow by 750 kb/d in 2017.”

U.S. oil production rose to an average 8.9 million bpd last week, according to data from the Energy Information Administration, partly on the backs of sale producers.

Canadian oil production is also on the rise, as oilsands expansion projects that were commissioned years ago begin coming on stream.

This week oilsands giant Suncor Energy Inc. announced higher production in the fourth quarter of 2016, due mostly to its bulked up stake in the Syncrude mining operation.

In addition, Canadian Natural Resources Ltd. is also boosting production as it expands its Horizon mine.

MEG Energy Corp., a much smaller oilsands operator, announced a $450 million equity issuance in January that will go toward expanding its oilsands operations by 20,000 bpd.

Growing production outside of OPEC could dampen the cartel’s hopes to raise prices gradually over the coming years.

International large cap companies continue to bring down operating costs, suggesting more production will be achievable around current prices. Researchers at Citigroup estimate large cap players will break even at an average of US$55-$60 per barrel in 2017, compared to US$75 per barrel in 2016.