Wildfires in Fort McMurray have brought the global tally of lost crude oil production up to 3.5 million barrels per day, setting the stage for a supply “cliffhanger” in crude oil markets, according to analysts.
Canada’s one-million bpd decline comes amid a spate of outages in Nigeria, Libya and other places, amounting to just around 3.5 million bpd, according to RBC Capital Markets estimates, exceeding last year’s global production increase of 2.7 million bpd.
“With all these interruptions, markets will be under-supplied quicker and allow us to chew through global inventories a little bit ahead of schedule,” said Jon Morrison, Calgary-based analyst at CIBC Capital Markets.
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CIBC is most bullish on oil prices among Bay Street banks, expecting U.S. crude prices to touch US$65 per barrel by the end of the year, compared to RBC Capital Markets’ US$50 forecast and BMO Capital Markets’ bearish US$42.20 prediction.
Canadian heavy oil benchmark Western Canada Select was trading Monday at its highest level this year at $33.20 per barrel, and at its lowest discount year-to-date to the U.S. benchmark. However, U.S. crude pulled back 2.8 per cent Monday to US$43.44 as traders weighed the Alberta production declines with bearish news from Saudi Arabia.
Oil prices may surge, but oilsands producers would likely miss the bump in profits.
“In no way shape or form is this positive for any Canadian producer. Even if prices rise, their underlying production is low,” Morrison said. “Ultimately, it’s a tragedy.”
Oil prices have plunged 50 per cent over the past 18 months on supply glut, but the excess supply is slowly draining as major oil producers face a string of production outages and declines.
Francisco Blanch, analyst at Bank of America Merrill Lynch, warned clients last week about an “oil supply cliffhanger.”
U.S. oil production is expected to decline by 600,000 bpd this year and another 300,000 bpd next year, as companies struggle to cope with sub-US$50 prices.
“Non-OPEC oil supply is indeed hanging off a cliff. We estimate global output is set to contract year-on-year in April or May for the first time since (the first quarter of) 2013 as OPEC growth no longer offsets non-OPEC declines,” Blanch said in a report.
And not every OPEC member will contribute to an increase in production. Libyan production has shrunk to 200,000 bpd, a fraction of the 1.6 million bpd it pumped before the civil war in 2011, as a rebel government in the country’s eastern region blocked exports.
“We have warned consistently on Libya given these factors and the presence of Islamic State in the country, and we remain pessimistic about the country’s production prospects,” RBC Capital Markets said in a report last week.
Nigerian production is already operating at a 23-year low at 1.7 million bpd as insurgents step up their attacks on the country’s oil infrastructure.
Venezuela is also facing a structural decline in production on lack of investment and government mismanagement. The country’s production is set to decline by 250,000 bpd to 2.35 million bpd — its lowest level since 1990, according to consulting firm IPD Latin America.
Brazil’s production is also hovering at its lowest level in a year at 2.26 million bpd, with state-owned Petrobras involved in a major corruption scandal.
“Over the past 18 months, the market has brushed off any sort of geopolitical supply-side risk due to record inventory buffers. But at what point do these levels get too large too ignore,” says Michael Tran, analyst at RBC Capital Markets. “As we continue to see unplanned outages, this is a market that could tighten in a hurry and probably does warrant some geopolitical risk premium injected back in the market at some point.”
But oil prices are constrained by rising Iran oil production — up 700,000 bpd — since last year. Meanwhile, Saudi Arabia replaced oil minister Ali Al-Naimi with Khalid Al-Falih, chairman of state-owned Saudi Aramco over the weekend. While it does not represent a huge shift in Saudi policy, the kingdom may try to push production to above its current level of 10.2 million bpd, as a show of strength.
“On paper they have about 12 million bpd of spare capacity. They can probably get to 11 million bpd easily and it may take them another year to get to 12 million bpd,” says Tom Pugh, London-based analyst at Capital Economics. “But that would be a big statement to the market, they would effectively be flooding the market. They will be cutting off their nose to spite their face.”