COVID and surging production dampen oil
Lockdowns in Europe causing demand to fall
New oil is flooding the global market at the same time the resurgence of COVID -19 in Europe and elsewhere is causing demand to crater. It’s a confluence analysts call “the sum of all fears” and could hang over oil markets well into 2021.
Global oil prices fell as much as 6 per cent into the US$ 34 per barrel range for the West Texas Intermediate benchmark in Asian trading Monday, but recovered as European and North American markets opened. Indeed, WTI prices traded up on the New York Mercantile Exchange to US$ 36. 96 per barrel on Monday, which is lower than the US$ 40- per- barrel range that crude has traded in recent weeks.
Brent crude declined 10 per cent in October, while the WTI dropped 11 per cent on fears of evaporating demand, and as many European countries went into lockdown to stop the virus from spreading.
The Western Canadian Select heavy oil price, which many oilsands producers get for their crude, has also tumbled in the past month from over $ 30 per barrel but did trade up almost 7 per cent, or $ 1.75 per barrel, on Monday to $27.12 per barrel.
Analysts say a combination of weak demand for crude and simultaneously ballooning production from
Libya and Alberta is dragging down the price of oil. The Alberta government announced Oct. 23 that it would end its curtailment order in the province, which had imposed strict limits on how major oil companies could produce.
“This purposeful approach serves as an insurance policy, as it will allow Alberta to respond swiftly if there is a risk of storage reaching maximum capacity while enabling industry to produce as the free market intended,” Alberta Energy Minister Sonya Savage said last month, noting the province produced 3.1 million bpd in August, below the 3.81 million bpd limit. Oil producers in the province pumped close to 3.9 million oil barrels per day in December 2019.
Cenovus Energy Inc. is likely to raise production in December, with volume depending on prices, and expects rivals to re- start their curtailed capacity, chief executive Alex Pourbaix said last week.
Suncor Energy Inc. also said last week it would raise production at its Fort Hills mine in 2021 and is making improvements at its Firebag site to squeeze out more capacity. The company’s could rise 10 per ecnt in 2021, Little said, from expected total 2020 production of 680,000 to 710,000 barrels of oil equivalent per day.
The outlook for crude is particularly challenging to predict given Tuesday’s U. S. presidential elections, in which candidates Donald Trump and Joe Biden have vastly different policies on oil production and fracking.
“The global oil market was already soggy to begin with. The market is going to have a hard time absorbing the additional barrels from Libya,” said Michael Tran, managing director of global energy strategy with RBC Capital Markets in New York.
The additional Libyan barrels might not have had such a large effect on global oil markets in a normal year, but lacklustre oil demand as a result of the coronavirus pandemic and a fresh wave
of lockdowns in Europe turn small changes in oil supply into large swings in oil prices.
“It magnified the outsized downward risk to this market because global oil demand has been just hanging in there,” Tran said, adding that he thinks “anemic oil demand” would be a good outcome for oil markets considering a fresh wave of European economic lockdowns that could cause demand destruction.
New lockdowns and partial lockdowns in European countries, including in the U. K. over the weekend, are dragging down forecasts for oil demand this year and next.
“If we’re able to revert back to the US$ 40- level, I think that’s the best scenario,” Tran said. Next year, Tran expects global oil prices to trend in the US$ 40- per- barrel range for the first half of the year but climb into the $50 range at the end of the 2021.
Daily output has reached 800,000 barrels per day and the country is targeting 1.3 million by the beginning of 2021, said Mustafa Sanalla, the chairman of Libya’s
state- run National Oil Corp. That compares with just 100,000 barrels a day in early September.
Libyan oil production has ramped up faster than expected and hit the market “at the worst possible time,” said Ian Nieboer, Calgary- based managing director at oil analytics firm Enverus.
The combination of surging oil production and weakening demand represents “the sum of all fears” for the oil market, Niebor said.
The final quarter of 2020 was when most analysts had expected to see “substantial stock draws” from oil in storage but lower-than-expected withdrawals mean the oil price improvement that was expected in the fourth quarter is being pushed back to next year.
“We’ve seen the whole curve move down,” Nieboer said.
As the outlook for oil deteriorates, many analysts see the outlook for natural gas improving, in particular ahead of the U. S. presidential election where former vice- president Joe Biden is leading in the polls and has pledged to ban hydraulic fracturing on federal lands.
For the first time in years, the outlook for natural gas prices in North America has improved dramatically, largely as a result of oil production declining in places like Texas, and taking associated gas off the market. The Henry Hub natural gas benchmark price in Louisiana averaged US$ 3.29 per mcf on Nov. 1, while Alberta’s AECO price averaged US$2.51 per mcf.
“While oil could certainly find itself out of favour, gas will likely continue to receive under the radar support as its development assists with key climate and foreign policy goals,” RBC Capital Markets analysts wrote in a Nov. 1 research note.
“It is our understanding that gas is still viewed as an important transition fuel for facilitating coal displacement for power generation globally and that US exports are seen as helping to weakened Russia’s hold on European gas markets,” the analysts wrote.