Tuesday, December 4, 2018

Are Alberta’s Oil Quota’s really necessary?

Oil pricing based on so-called oil supply-demand math is highly questionable (see previous post(s).  I consider the most recent fall in WTI and Brent pricing manipulated by speculators and … Trump.  Trump seems to be the ultimate manipulator. First he announces cancellation of the Iranian nuclear deal.  Oil prices strengthened but not just because of speculation on coming supply cuts. Next Trump calls oil prices too high (just like he is disavowing the Fed for raising interest rates). Then the murder at the Saudi embassy in Turkey where Trump plays friend with the Saudi’s. So the latter are obliged to obey and increase production together with the Russians, squeezing every drop from their remaining production capacity.  But when the Iranian boycot should be implemented, Trump sticks a knife in the back of the Saudi’s and allows special ‘waivers’ to continue Iranian oil exports. The oil price collapses further enhanced by maintenance shut-downs at many refineries to prepare for winter/summer production. Voila, an oversupplied market (temporary) and a significant drop in oil prices.

Is Trump really that smart? I wonder. His bluster is nearly becoming a trade-mark. The China-U.S. trade war was carried out with a lot of bluster until just past the mid-term election when a combination of tariffs and a super strong dollar are just starting to bite into U.S. corporate profits. Then, suddenly, the trade language softens culminating at the G20 and voila stock markets pick up.  This ‘suddenly’ improves the economy and worldwide oil prices shoot up along with rumors OPEC and Russia may cut back production. Duuuuh!!!

Due to refinery shut-downs which always occur in North America during spring and fall to switch seasonal production, this year the discount rates were falling to extreme levels. Capitalism suggests that Alberta producers cut back. Nothing happens after Cenovis on its own cuts production by 10%. I am sure Canadian Natural and others were not producing at peak levels either. The discounts did not let up. This summer the discount was $23 dollars – substantial but not insurmountable. The Trump manipulations together with the refinery shut-downs and lack of pipeline capacity created this ‘crisis’. 

The moment Notley announced the official implementation of quota’s (which may have been anticipated by these large producers) and just before several refiners announced that they were operational again caused a sudden price reversal. The speculators reacted belatedly while most of the elements for the production cuts were already I place (Cenovis won’t cut back further than the 10% cuts already implemented). Over the coming year up to the opening of Enbridge Line 3 near late 2019, we are reducing the excess production and lowering Alberta oil in storage. At the same time, we’re likely recover soon from Trump’s price manipulations especially when OPEC and Russia revert to less extreme production capacity.

My prediction for oil and already improved gas pricing (natural gas in North American storage has already significantly declined) and in anticipation of the new LNG plant in Kitimat remains as it was:  higher natural gas prices which are now in excess of U.S. $4.00 on NYMEX and a return of WTI pricing to $80 during most of 2019. The boom or Calgary is coming especially if Trudeau is shown the door (but that latter is far from certain).

1 comment:

  1. BTW Friday Dec 7, 2018 WTI closed at 52.36 and WCS at 37.63 thus the discount in less than a week has shrunk to less than $15. Still a lot but not a complete disaster.