Provinces keep eye on OPEC deal
Easing oil output could lift prices, but analysts wary of agreement
Canada will certainly benefit if the world’s biggest oil-producing countries move to restrict production, but skepticism exists about whether they will follow through on their promises.
“Assuming they stick to it, and that’s a big if, it should support oil prices,” said Benjamin Reitzes, senior economist at BMO Capital Markets. “The competition producing a little less is always good.”
But many analysts noted that the deal by the 14member Organization of Petroleum Exporting Countries (OPEC) in Algeria on Wednesday was merely an agreement to look at possibly cutting production to between 32.5 million and 33 million barrels a day.
That would be down from August’s production rate of 33.2 million barrels a day — but it would shave only 700,000 barrels a day, some 2 per cent of overall production.
Crude oil was selling for more than $100 (U.S.) a barrel in the summer of 2014 before bottoming out below $30 a barrel in January.
That fall largely came from a boom in U.S. shale oil production and countries such as Saudi Arabia choosing to continue to pump to hold onto market share.
“If OPEC performs as it has in the past and not adhered to production quotas, we would expect the price would not go up.” SPENCER KNIPPING ANALYST, ONTARIO MINISTRY OF ENERGY
Since then, a deal between Iran and world powers over its contested nuclear program has allowed it more firmly back into the global oil market — and it wants to make up for lost time by boosting its production.
Producers such as Venezuela and Ni- geria have faced tremendous economic pain as oil prices remain low. Even megaproducer Saudi Arabia has cut salaries for senior government officials while eating through its foreign reserves.
The economies of oil-producing Canadian provinces such as Alberta, Saskatchewan and Newfoundland have suffered amid persistent low prices.
Oil producers have shuttered projects and eased off on production. Workers have been laid off, with tens of thousands of direct and indirect jobs lost. Alberta’s current recession looks like it will be the longest in the province’s history.
When the NDP provincial government delivered its fiscal update in late summer, it warned that its deficit will rise to almost $10.9 billion this year. It expects to borrow $7 billion this year for operating expenses, almost one-third more than the original $5.4 billion it had budgeted.
Few in Alberta are celebrating OPEC’s surprise move. That’s because the members still need to hammer out details on country-by-country production rates at its November meeting, so any production cut won’t be implemented until late this year at the earliest.
Reitzes said any rise in oil prices will help Canada, but cautioned that if oil prices rise above $50 a barrel, U.S. shale producers might ramp up their production, adding to supply.
By contrast, Canadian oilsands companies face much higher costs to get oil out of the ground while trying to make a profit.
Colin Cieszynski, chief market strategist at CMC Markets, said there is skepticism about whether OPEC members will hold to a commitment.
It has been eight years since the countries restricted production — and it looks like they are moving toward being on the same page, he said.
“But even if they get an agreement, oftentimes producers cheat,” Cieszynski said. “It’s a first stage. It’s the beginning of a process, not the end.”
Spencer Knipping, an oil analyst with the Ontario Ministry of Energy, said it looks like Saudi Arabia, which has the largest production capacity, is feeling the pinch from low oil prices and is ready to make a deal.
Although OPEC’s promises can result in a short-term boost in oil pric- es, the key is whether members are all committed to a production cut.
“If OPEC performs as it has in the past and not adhered to production quotas, we would expect the price would not go up,” Knipping said.
That would mean little change to gasoline or diesel prices for consum- ers and would provide only a small lift for the Canadian economy that is heavily weighted on resources.
“We know the world is producing more oil than it is consuming,” he said, and inventories are continuing to rise, though not at as high a rate as before. “It’s the knowns that are causing people to be cautious about future price projections.”
He noted that the International Energy Agency believes the world oil market will not rebalance until late 2017, when supply will be in line with demand as inventories flatten out. With files from Star wire services