OPEC cut could spark activity in Canada

‘A VAST DIFFERENCE’

JESSE SNYDER CALGARY • The agreement by OPEC members to cut production Wednesday could provide much-needed cushion for Canadian oil producers, although there are lingering doubts over whether the cartel can ultimately meet its stated targets.

During discussions in Vienna, OPEC ministers agreed to collectively cut back 1.2 million barrels per day of production in order to ease a two-year oil market glut. The deal is contingent upon non-OPEC countries such as Russia cutting 600,000 bpd of production, for a total reduction of 1.8 million bpd. OPEC and nonOPEC members will meet Dec. 9 to discuss the details of that broad-based deal.

“It’s a very large cut,” says Jackie Forrest, the vice-president of energy research at Arc Financial Corp. in Calgary.

Forrest said a successful OPEC cut would “immediately” shift markets into deficit territory, in which oil demand outpaces supply. Oil markets have effectively remained oversupplied for the past two years as some OPEC and non-OPEC members continued to pump out crude at record levels, depressing prices.

Prices for benchmark crude West Texas Intermediate ended the day 9.3 per cent higher, to just under US$50. The Toronto Stock Exchange hit an 18-month high Wednesday as energy stocks climbed.

Barclays Capital analysts expect Canadian heavy oil production to rise over the next two to three years “which should help to mitigate some of the impact on the heavy oil differential from the OPEC cut.”

The transition toward a deficit market could in turn also spur new activity for Canadian tight oil producers, who are more reactive to short-term price fluctuations.

Grant Fagerheim, the CEO of oil producer Whitecap Resources Inc., expects to spend $300 million in 2017 if prices remain at their current levels, but said the company would likely revise that figure in the second half if prices surpass the US$55 threshold.

“We can always adjust for the back half of the year,” he said. He estimates spending could be revised upward by between $50 million to $100 million. The company roughly expects prices to average between US$50 and US$55 through 2017.

“This makes a vast difference,” Fagerheim said of the OPEC deal.

Some of that activity was expected to return regardless of an OPEC deal, but a successful cut could dramatically hasten that return.

“Even with prices averaging US$50 next year, we expect activity to pick up,” Forrest said. Prices in 2016 have averaged around US$42 year-to-date.

Already some analysts are revising their outlooks for crude prices. The OPEC deal marks the “next up leg” in oil prices, Eric Nuttall, a portfolio manager with Sprott Asset Management, said in a written statement. He estimates prices are likely to climb above US$60 per barrel in 2017 and continue to rise in 2018.

Nuttall, like others, has maintained that oil markets were undersupplied even before the cut, which is set to “meaningfully accelerate the process.”

The deal is a stark divergence from the long-standing stance of OPEC, which repeatedly failed to agree to a broad output cut. Analysts at Bernstein Research said in a research note that the decision marks a shift in OPEC tactics from “market share to price maximization.”

The deal comes after a growing sentiment in recent days that Saudi Arabia would have to shoulder the bulk of the cuts, potentially causing the kingdom to back out of a deal.

Several analysts who attended the meetings Wednesday said that sentiment began to shift in early discussions after the details of the deal were hammered out.

“From the beginning, the mood was much better this morning,” said Helima Croft, the global head of commodity strategies at RBC Capital Markets.

But many analysts are still deeply uncertain about whether OPEC will ultimately meet its stated targets.

In particular, analysts are skeptical about Russia’s contribution to cut production by 300,000 bpd, which would make up half of the non-OPEC cuts laid out in the deal. OPEC did not provide further details around where the other non-OPEC cuts would come from

“We find it difficult to find other non-OPEC countries that could add to Russia’s stated 300 kbpd commitment,” Barclays analyst Andrew Smith said in a research note.

Within OPEC itself, there is also a lack of details — particularly around Indonesia, which suspended its membership in the cartel Wednesday after refusing to accept its portion of the cuts.

“They were one of the loudest voices yesterday questioning the need for a deal,” Croft said.

OPEC ministers said Indonesia’s small share of the total cuts will be distributed evenly between all members.

Saudi Arabia is responsible for the largest share of the cuts at 486,000 bpd, effective January 2017. The next-largest share is Iraq at 210,000 bpd — a number that surprised analysts considering Iraq’s recent quarrels with other members over the methods it was using to tally up its total production. The country has been “double counting” production from some of its northern oil facilities that were taken over by the Kurdish regional government in 2014, analysts said.

OPEC said the deal was becoming increasingly necessary as many members struggled to balance their budgets and maintain certain government subsidy programs. Oil ministers of the Organization of the Petroleum Exporting Countries meet in Vienna on Wednesday.