OPEC’s ‘Hunger Games’ leave producers to fend
With OPEC’s oil price circus over till its next grand show during its annual meeting on June 2 in Vienna, investors can now concentrate on the cold fundamentals of the market.
And those fundamentals are looking good.
“We shouldn’t confuse the forest from the trees,” said Michael Tran, commodity strategist at RBC Capital Markets. “Regardless of what OPEC would have come up with, physical balances would have not been impacted immediately any way.”
With Saudi Arabia insisting that Iran adhere to an output freeze agreement, the negotiations during this past weekend between 17 oil producers, including Russia, were doomed to fail.
“The collapse of the producer-producer talks in Doha have been seen as the result of geopolitical issues between Saudi Arabia and Iran,” Edward Morse, analyst at Citigroup, wrote to clients in a report.
Markets initially reacted badly to the disastrous meeting, falling nearly seven per cent at one stage, but rallied on news that Kuwait’s oil workers had walked off the job in an indefinite strike. U.S. crude West Texas Intermediate (WTI) benchmark closed down 1.4 per cent, at US$39.78 a barrel, after sliding to US$37.61 at one stage.
Kuwait, OPEC’s fourth-largest producer, reported its output had fallen to 1.1 million bpd over the weekend, from 2.8 million bpd produced on average in March, leaving the market short by 1.7 million bpd.
“That’s a huge number. It seems likely to be a short-lived strike, but these outages are really piling up; 1.7 million bpd goes so much further to actually rebalancing the market,” Tran said, noting that RBC expects to see oil prices at US$50 per barrel by the fourth quarter.
The disruption brings to the fore OPEC’s shrinking spare production capacity, currently at around 2.7 million bpd compared to the long-term average of 4.2 million bpd.
“We do not believe that current oil prices include a risk premium despite low levels of spare capacity,” Randy Ollenberger, analyst at BMO Capital Markets said in a report.
“This is due to current oversupply and record levels of crude oil and petroleum product inventories. However, we believe the potential for the re-emergence of a risk premium exists due to rising outages and geopolitical risk.”
Deloitte expects oil prices to steadily rally to US$58 per barrel by 2018 as market will suffer a supply shortage of over one million bpd on rising demand and a slew of cancelled projects.
Other indicators also point to an upturn in prices.
The United States — the world’s largest automotive market — would likely see a surge in gasoline demand over the summer even as domestic production is falling, says Jay Hatfield, portfolio manager at InfraCap MLP ETF Fund, based out of New York.
“With the one million bpd output decline and 700,000 bpd surge in demand, the U.S. alone should roughly balance out that market for oil some time this year,” Hatfield said in an interview.
U.S. crude oil production is expected to fall to 8.6 million bpd in 2016 and eight million bpd in 2017, compared to 9.4 million bpd last year, according to estimates by the Energy Information Administration, the statistical arm of the U.S. Department of Energy.
Meanwhile, CIBC Capital Markets expects oilsands production to grow by about 200,000 bpd this year, offset by as much as 150,000 bpd of declines in conventional production.
“The Hunger Games continue for most of OPEC,” said Helima Croft, global head of commodity Strategy wrote in a report, referring to the blockbuster movie that focused on the Darwinian theme of survival of the fittest in a rigged, fight-to-the death competition.
“With the Doha meeting ending in a bust, the pain is set to deepen for the vast majority of sovereign producers and physical oil output is increasingly at risk in several of the more distressed countries,” Croft said.
While as many as 59 North American energy companies have filed for bankruptcies since the start of 2015, some producers have given up on OPEC throwing them a lifeline and have focused sustenance in low-cost basins.
Husky Energy Inc. said Monday it had started producing 10,000 bpd from its Edam East Lloyd Thermal Project in Saskatchewan, with another 15,000 bpd of production expected to commence in the third quarter. The company’s operating costs in the basin averaged around $7 per barrel in the fourth quarter of 2015.
“Our growing portfolio of heavy oil thermal projects continues to lead Husky’s transition into a low sustaining capital business,” CEO Asim Ghosh said in a statement. “Edam East is another example of the quick ramp ups that we’ve come to expect from these developments, which have operating costs among the lowest in the industry.”