Oilpatch to proceed with caution despite OPEC production deal
CALGARY Shares of Canadian oil and gas producers continued to rally Thursday, a day after OPEC’s agreement to cut production, but wary oilpatch executives were holding off on the celebrations.
“I wouldn’t say that it’s going to lead to a sea change in prices,” said Anthony Marino, president and CEO of Calgary-based Vermilion Energy Inc., who nonetheless called the OPEC deal a “positive sign.”
Domestic oil producers remain skeptical about the longer term direction of prices even as benchmarks continued to rise Thursday, with West Texas Intermediate reaching US$47.83 per barrel, up 1.7 per cent, the highest in a month, after a six per cent rally Wednesday on the agreement by OPEC members for their first output cut in eight years.
Vermilion added almost four per cent, Suncor Energy Inc. rose 2.3 per cent and Canadian Natural Resources Ltd. gained 2.4 per cent as the energy sector advanced 1.4 per cent. The S&P/TSX Energy Index has rallied 5.1 per cent in its best two-day gain since March, rising to a three-week high. Marino said the wider energy industry will be watching to see whether OPEC members formally agree to the production limit of between 32.5 million and 33 million barrels per day at their meeting in November; until then, they will proceed with caution.
In the past, some OPEC member countries have cheated on production limits, and Marino said he expects the same thing could occur should an agreement be reached. Still, he said, “Even if (the limit) is not fully complied with, it will bring forward the rebalancing of the market.”
Oil and gas producers in OECD countries have struggled for the past two years as crude prices have tumbled while OPEC members have pumped record amounts of crude into the global market.
There have been a few shortlived oil price rallies during the prolonged commodity price rout and many producers have taken advantage by hedging their production — buying the option to sell their oil in the future at a higher price — despite wariness about a longer recovery.
Oil production in Canada has actually increased during the past two years, thanks in large part to longer-term investments in the oilsands.
Suncor president and CEO Steve Williams said in an email that this week’s OPEC agreement “is a signal that supply and demand fundamentals work as clearly production at these price levels is not sustainable.”
Oilsands companies have been focused on driving down production costs in the face of low prices. Williams indicated that wouldn’t change even with an OPEC agreement.
“There was a misconception that the Canadian oilsands were at the top of the cost curve and that they would be the first to stop producing. We knew this indicated a misunderstanding of our economics and of our business,” Williams said.
In the meantime, the oilpatch is bracing for more price fluctuations.