Canada missing chance to be ‘first responder’ after oil shock
CALGARY High-precision attacks on critical Saudi Arabian oil infrastructure could compel major consumers of the commodity to diversify their energy sources, but Canada won’t be one of them.
Global oil prices surged 14 per cent, or US$7.71 per barrel, to US$62.56 as markets reacted to rocket strikes on Saudi Arabia’s 5.7-million-barrels-per-day Abqaiq oil facility, which RBC Capital Markets managing director, global energy strategy Michael Tran called “the central bank of oil.”
The price jump and the resulting energy sector surge also pushed the TSX to a record high, and nudged both the loonie and price of gold higher.
Given reports of the damage so far, analysts believe Abqaiq, which represents 60 per cent of Saudi capacity, is likely to be offline for months. In response to the supply shock, Saudi Arabia is expected to draw oil from storage and the U.S. is preparing to dip into its Strategic Petroleum Reserve.
As a result, analysts and economists believe the hit to global oil supply will amount to roughly three million bpd — enough to lift oil prices by as much as US$10 per barrel and also reintroduce a geopolitical risk premium to the oil market.
“Canada could, in theory, have been the first responder,” RBC Capital Market’s Tran said of the country’s ability to supply the global market.
Instead, Canadian companies are likely to enjoy the spike in oil prices through higher returns on their existing production levels but won’t be able to pump more oil to capture more of the upside because export pipelines are chock full.
“The Canadian energy industry remains hamstrung with other types of geopolitical risk,” Tran said, referring to the oil curtailment order in Alberta, delays on major export pipelines to the West Coast and U.S. Gulf Coast and restrictive regulations on new energy infrastructure.
Whitecap Resources Inc. president and CEO Grant Fagerheim said the attack on Saudi Arabia won’t change the company’s behaviour in the immediate term but it could help attract some investors who had left the country.
Canada sits on the world’s third largest oil reserves after Venezuela and Saudi Arabia. “This could be an opportunity to alter the narrative a little bit about the stability of Canadian energy,” Fagerheim said, noting that Canada was once viewed by energy investors as a stable place to invest but investment dollars have migrated south to the Permian basin in Texas, which has been a major source of supply growth.
Whitecap is in the middle of setting its budget for 2020 and the attack on Abqaiq is likely to affect oil price assumptions for next year.
Some analysts believe the oil price response to the attack actually understates the magnitude of the event. “To date, I’m surprised the price response is as muted as it is,” RS Energy Group chief economist Judith Dwarkin said.
Dwarkin said in recent months there have been smaller-scale production disruptions following violence in Libya and elsewhere but oil markets have “hardly quivered” but the attack on Saudi Arabia is a much higher magnitude event.
As U.S. and Saudi officials accuse Iran of perpetrating the attack, most economists and political analysts believe there could be additional attacks or escalation in the coming months.
“I don’t think we’re anywhere near done with this event,” said Scotiabank commodities economist Rory Johnston, adding the market is now grappling with the question: “Where do we go on the energy security side?”
Financial Post