Oil jumps as others join OPEC cuts

ANALYSTS WARY

CALGARY • Oil prices surged on Monday following a deal between OPEC and non-OPEC members to curb production, triggering a jump in share prices of ailing Canadian oil and gas companies.

Prices for West Texas Intermediate rose more than three per cent Monday to US$53 as of 2:30 p.m. ET, its highest level in roughly 18 months; WTI closed at US$52.83.

Rising oil prices bolstered Canadian oilsands companies. Cenovus Energy Inc. was up 1.45 per cent on the day, while MEG Energy

Corp. saw a 7.74-per-cent jump. The biggest gains among more-integrated players included Husky Energy Inc. (4.19 per cent) and Imperial Oil Ltd. (2.58 per cent).

Oil market participants were responding to a deal between OPEC and nonOPEC members in Vienna on Saturday to trim back production. The deal, which involves 24 oil-producing countries, would cut as much as 1.8 million barrels of oil per day out of the global oil market, hastening a return to supply-demand balance.

The deal quieted some concerns over whether OPEC could persuade nonmembers to join in a cut, with 11 non-members, including Russia, Mexico, Oman and Kazakhstan, collectively agreeing to cut roughly 558,000 bpd.

But analysts remain wary over whether participants will follow through on production cuts.

Analysts at Sanford C. Bernstein & Co. LLC said many of the proposed declines would have come even without a deal, either due to seasonal slowdowns in demand or declining productivity.

The analysts expect OPEC and non-OPEC members to follow through on roughly 70 per cent of targets, and U.S. shale production to grow at a moderate rate of 500,000 bpd in 2017.

“This will not be enough to offset the decline in OPEC and non-OPEC output plus the additional 1.2Mbpd in demand growth,” the analysts said in a research note. The investment firm pegs its target for oil prices at US$60 per barrel in 2017, and US$70 for 2018.

Others are less bullish on prices. Michael Cohen, an analyst at Barclays Capital, said U.S. shale producers in particular could make up an unexpectedly large portion of the production gap after dramatically lowering their operating and capital costs.

“The cost savings over the last year are going to be sufficient to see a lot more new sales come onto the market than what may have been envisioned a year ago,” he said.

“The problem is that there are a lot of moving parts. A higher price means more supply from price-sensitive suppliers, and it means less demand from everywhere.”

Barclays sees prices peaking at US$60 in the second quarter of 2017, then falling to US$52 over the final quarter of the year.

Citigroup analysts believe Saudi Arabia’s forecast for a limited 2017 shale rebound “seems gravely misplaced,” noting “shale producers will be grateful for OPEC and non-OPEC producers making room in the market.”

They said US$50 oil is a “key level above which U.S. shale oil output can grow concertedly, and if OPEC/ non-OPEC countries hold to their proposed production cuts, the call on U.S. shale rises significantly,” Citi analysts said.

Barclays’ Cohen said this is partly due to new supplies and slowing demand, but also because of the long lag time in data.

Many OPEC members have continued to misrepresent their own production data, for example by categorizing condensate as crude oil, or by exaggerating the productivity of refinery outputs.

The result could be a shift in reported numbers rather than actual production volumes, which would add to global oil supplies.