National Post (National Edition)
Oil rally only short term: analysts
Spike based on Trump tweet of call with Saudis
In a sign of how badly oil markets have been ravaged in recent weeks, not even a 71 per cent surge in the price of a barrel of Western Canadian Select Crude on Thursday could convince analysts the sector’s outlook is brightening.
The spike followed a Twitter announcement by U.S. President Donald Trump Thursday morning that he had convinced Saudi Arabia and Russia to cut oil production, and that the Saudis later in the day asked for a meeting with other oil producing countries to balance the global oil supply.
Nonetheless, even if the Saudis reduce their oil production, and if the Chinese government follows through on an announcement that it would increase its purchases and stockpile crude in coming months, analysts predicted more rough times ahead.
Citing a dramatic contraction in demand for oil in the wake of the coronavirus, many analysts are predicting a wave of ‘shut-ins’ in the near future, including in Canada where production is already dropping.
Already, the industry is bracing for the worst — on Thursday, Calgary-based Cenvous Energy Inc. announced $600 million in spending cuts through reductions to its dividend and other expenses.
“This is another example of how dire shape the industry is in,” Phil Skolnick, an analyst with Eight Capital wrote in a note. “We reiterate our view that things will get worse before they get better for the sector given the supply glut caused by Saudi Arabia colliding with massive demand destruction caused by COVID-19.”
In what proved to be a news-packed day for the sector, Trump said he expected Saudi Arabia and Russia to cut back 10 million barrels, presumably per day, but the details remained hazy.
Ann-Louise Hittle, vice-president of oil research at Wood MacKenzie wrote on Twitter that there was “something wrong in the numbers” given that this would require a roughly 88 per cent reduction by Saudi Arabia. The Wall Street Journal reported that Saudi Arabia was contemplating a 10 per cent cut in its oil production — if other countries agreed to make reductions as well.
“This is the big news,” Hittle wrote.
As far as China’s announcement that it would increase its stockpile, Bjornar Tonhaugen, head of oil markets research at Rystad Energy, believes that at most this may increase demand by one million barrels per day during the second quarter. Tonhaugen characterized it as a “drop in the ocean compared to the mother of all oil surpluses.”
The developments buoyed oil prices, with Western Canadian Select Crude closing 66 per cent higher to $8.8 — still nowhere near its price of $56.30 a year ago. U.S. West Texas Intermediate (WTI) crude rose 24.7 per cent to settle at US$25.32.
S&P/TSX Capped Energy Index jumped nearly 9.6 per cent on the day, but remains down almost 60 per cent year-to-date.
Many analysts predict it would be a short term gain, saying a severe contraction in demand remains the principle challenge for the sector.
Research firm IHS Markit noted it expects global demand for oil in April to drop by 20 million barrels per day compared to one year ago as a result of coronavirus containment measures that have frozen economic activity.
The result is an oil surplus, in which production exceeds demand, and global storage capacity is rapidly disappearing, according to IHS. It expects that between now and June, global producers must cut approximately 10 million barrels of oil per day, and prices will still scrape the bottom.
“Some producers may experience ‘negative prices’ where they pay a buyer to take their crude oil,” IHS analysts wrote.
Teck Resources owns 21.3 per cent of the Fort Hills oilsands mine in Alberta, and its CEO Don Lindsay said in a presentation to investors Thursday that it’s considering a full shutdown of the mine. Last week, they reduced production at the mine.
A spokesperson for Suncor Energy Inc., which operates the mine and owns the other 54.11 per cent, said the parties have not yet discussed a full shut down and it would require unanimous approval. France’s Total SA owns 24.58 per cent of the project.
Other Canadian producers have already reduced production by tens of thousands of barrels per day, according to analysts’ calculations.
Meanwhile, on Thursday, Cenovus announced $600 million in cuts to expenses, including capital expenditures, overhead and $100 million from dividend.
A spokesperson said the company can quickly ramp up or ramp down production and the company is monitoring the situation closely.
“The long and short of it is that the current rally will likely be short lived,” Edward Morse, an analyst with Citi Research wrote on Thursday.
Morse wrote that even if Russia, Saudi Arabia and the United States work out a deal now, it may “be too little too late” — prices still need to fall further to rebalance the market, Morse wrote.