Mixed news for Alberta: Oil prices up, but growing US supply threatens market rebalancing

Oil prices
Oil prices rose slightly in trading on Monday, but investors are concerned that increased supply from the US, Nigeria along with slowing demand could result in lower prices.  Statoil photo.

Alberta oil sands producers break even at $41 or lower

Oil prices rose on Monday after falling to seven-month lows last week, but growing US crude output along with an increase in demand for short sale contracts signalled that investors see a possible drop in prices on the horizon.

Brent crude futures settled up 29 cents to $45.83/barrel and are still on track for almost a 20 per cent drop in the first half of the new year.  US crude futures were up 37 cents to $43.38/barrel.

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“We had a market that was fundamentally oversupplied. We were literally putting barrels into storage tanks every single day and we had $45 oil,” said Jackie Forrest, director of research for Calgary-based ARC Energy Research Institute, told CBC.

“Now we have a market that is arguably balanced, we’re not drawing down the inventory, but we haven’t been gaining either and we have $45 oil.”

According to Reuters, investors in US crude futures and options increased their bets against any future price increases as the number of rigs drilling for oil hit the highest level in over three years.

“U.S. production could jump to 10, maybe 10.5 million barrels a day by the end of the year, and when you add Libya, Nigeria and North Sea production that will negate the Saudi-led cuts,” Gene McGillian, manager of market research at Tradition Energy told Reuters.

This increase in crude production could overshadow OPEC’s efforts to reduce the global oil oversupply.  Last November the cartel along with some non-member nations agreed to cut their output by 1.8 million barrels per day (b/d).

In May, the participants agreed to extend the pact, which was to expire in this month, to the end of March next year.

But US shale output has increased by 10 per cent over last year and Nigeria and Libya also boosted their production, which had been impacted by unrest.  Iran participated in the OPEC deal, but was allowed a small increase in production so it could recover market share lost under Western sanctions.  Iran is expected to produce 4 million b/d by March.

“The perception is that we’re going to have slower exploration activity, but the amount of drilling that we’ve been doing is going to guarantee production growth for at least another four or five months,” James Williams, president of energy consultant WTRG Economics in London, Arkansas told Reuters. “So you’ve still got the downward pressure there.”

Bank of America-Merrill Lynch analysts said demand had not grown quickly enough to cut into the crude glut.

“Looking into the second half of 2017, we now doubt that demand growth will accelerate sufficiently,” they wrote.

The Alberta oil sands has coped with lower prices by slashing production costs. Cenovus says it can break even at $41 crude and Suncor’s costs are even lower, according to analysts.

“Those kind of economics were not reality there three years ago, not even close,” Rob Mark, a portfolio manager with Raymond James, told CBC.