OPEC meeting sets stage for continued Alberta recovery
A pivotal moment for the province will unfold Thursday some 8,000 kilometres away in Vienna, one that could smooth the runway for a continued economic liftoff in 2017 — or kick the skids out of the nascent rebound.
Members of the Organization of Petroleum Exporting Countries (OPEC) will gather at the organization’s headquarters in Austria to consider extending production cuts that helped revive oil markets late last year.
An agreement to throttle back production for another nine to 12 months appears increasingly likely, given some encouraging comments made this week by oil ministers from Saudi Arabia, Iraq and Iran.
Analysts believe extending the deal should keep prices in the US$50-a-barrel range for the remainder of the year.
Such a price floor would provide some stability to the Canadian energy sector as it continues to crawl out of the deep crater created by the oil price collapse in 2014.
Without an extension, however, there would be more turbulence ahead for oil prices — and more bumps for Alberta on the road to recovery.
“If OPEC doesn’t hold together on this, I think the market will start to test the low $40s again,” says Rory Johnston, a commodity economist at Scotiabank.
“To get upward toward $55, I think you’d need a kind of cherry on top (of the deal) — whether or not that is deeper cuts, or a more stringent compliance mechanism … has yet to be determined.”
It’s been a tumultuous year for petroleum producers since crude prices tanked below US$30 a barrel in 2016. The brutal price war has caused pain across the Canadian oilpatch and throughout the world, including the 13 OPEC countries.
However, an agreement last November by OPEC and nonOPEC countries to throttle back production by up to 1.8 million barrels per day helped recalibrate the market. The accord runs out at the end of June.
The broader outlook for this year is somewhat rosier, albeit volatile.
Prices for benchmark West Texas Intermediate crude dipped down near US$45 a barrel earlier this month, but closed Wednesday at $51.36.
In Alberta, petroleum producers are finally spending more money after two intense years of cost-cutting. Capital investment on conventional oil and gas spending in Alberta is projected to rise by 21 per cent this year to $14.4 billion, according to provincial budget estimates.
“We feel when you take a step back and look at the macro view of OPEC — and hopefully tomorrow goes the way that everybody thinks it is — will protect that downward (price) pressure,” Scott Saxberg, CEO of Crescent Point Energy, said Wednesday at the company’s annual meeting.
“We’re more optimistic about ‘18 because of OPEC, how they’re talking.”
More spending means more drilling and more oilpatch jobs.
One-third of the 644 rigs in Canada were active in March, compared to just 12 per cent during the same period in 2016.
These are other signals to consider moving ahead.
Inventory levels in the United States have been difficult to whittle down and American shale oil production is on the ascendancy.
U.S. oil output has risen by 600,000 barrels per day since last September and is still climbing, with total output projected to hit almost 10 million barrels a day in 2018, according to the U.S. Energy Information Administration.
The “fly in the ointment” in OPEC’s plan has been the ability of resilient U.S. shale producers to respond quickly to improving prices while driving their down costs, said Judith Dwarkin, chief economist with RS Energy Group in Calgary.
OPEC will need to deepen cuts in a new deal if its members don’t want to see global oil stocks start to rebuild in the first half of 2018, she says.
For Alberta, the international intrigue involving OPEC has real-world implications at home.
The province’s economy contracted over the previous two years as oil prices plummeted, but recent economic data indicates a recovery is underway.
Alberta’s unemployment rate dipped to 7.9 per cent in April and total employment in the province has increased modestly in the past year.
Wholesale trade has risen for several consecutive months, retail sales are up about seven per cent from a year ago and residential construction is improving.
Marie-Christine Bernard, associate director with the Conference Board of Canada, said the OPEC meeting is important for Alberta because such a large portion of the province’s economy remains tied to the oil and gas sector.
“There’s still a lot of uncertainty how the extra production from the U.S. will impact prices, but we’re pretty optimistic about the outlook for Alberta,” she said.
Last week, ATB Financial released a new economic outlook for the province that projects the economy will grow by 2.7 per cent this year, after a brutal 3.8 per cent contraction in 2016.
“We’re still very beholden to not just one sector, but one commodity within that sector and that’s oil,” said ATB chief economist Todd Hirsch.
“If anyone doubts that, just look at how the drop in oil prices pushed this province into two consecutive years of contraction.”
While oil at US$50 a barrel stabilizes the industry and brings back some capital spending, it does not return the energy sector to its role as the growth engine of the province’s economy.
“Growth has come back, but we’re not back to where we were,” Hirsch added.
That’s true, but the foundation for modest growth is now taking shape for Alberta.
And a solid deal by OPEC members in Vienna this week should put one more building block in place.