Why North American producers will blink first in the global oil war

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SHAFAQNA (International Shia News Association) The standoff currently playing out between oil companies in North America and OPEC will end with Canadian and American producers likely to blink first, and that will happen this year, a number of senior oil price forecasters said Tuesday.

“It’s been Canada, to some degree, and the U.S. that have contributed to the oversupply,” Martin King, vice-president of institutional research at FirstEnergy Capital Corp., said in a speech to the Calgary Petroleum Club Tuesday morning, adding “there’s still pretty solid supply-side growth.”

Mr. King had been asked if, in the face of lower prices, Canadian producers should “blink first” and cut their production in the face of OPEC’s decision to continue pumping 30.5 million barrels of oil into the world market. Mr. King did not offer advice on what to do – to cut, or not to cut – but simply described the pressures facing the oil market.

Later, analysts told an oil and gas conference that oil prices could trend lower during the first half of the year as more new oil production enters the market, and predicted supply in North America would eventually decline, which would rebalance the market.

“Unconventional oil has been the most disruptive geopolitical factor in the market since the OPEC revolution – since the 1970s,” Edward Morse, Citigroup’s global head of commodities, told the conference, presented by Conference Board of Canada.

Oil production in North America has exploded in the past decade with the rise of unconventional production methods in both the oilsands and shale oil plays, which have flooded the North American refining market with a glut of crude oil.

On Tuesday, the West Texas Intermediate oil price benchmark fell US$2.30 to US$46.39 per barrel, less than half the price WTI traded for in June.

“The largest refining market in the world, the U.S. market, has been depriving OPEC countries of incrementally, and perhaps on an accelerated basis, of their largest market,” Mr. Morse said.

Slightly more than 10 years ago, Mr. Morse said, the U.S. and Canada imported more than 2.6 million barrels of crude per day. “Today the U.S. and Canada are importing roughly 300,000 barrels per day from outside of North America,” he said.

As a result, Saudi Arabia is keen to flood the market with oil and keep prices low, thereby forcing U.S. and Canadian players to cut their production. The result would be the Saudis and OPEC regaining market share at North American refineries. “It will be a big sweat before it’s all over,” Mr. Morse said.

Société Générale’s global head of oil research, Michael Wittner, predicted a slowdown in North American oil and gas production in response to depressed commodity prices.

“Non-OPEC growth, we do have slowing this year,” Mr. Wittner told the conference. “There has been absolutely no impact so far and we don’t expect to see any impact until the second quarter, when it will be gradual and steady.”

“The fundamental mechanism for balancing the market has changed,” Mr. Wittner said. The new mechanism is shale oil wells, which produce a lot of crude when drilled but see production taper off by 75% within their first year of operation.

“In the end, it’s going to be the steep decline rates that are going to do the job,” Mr. Wittner said, adding that he also expected reduced drilling and fracking activity in North America.

“We will see a hit on the supply side — not all of it will come from North America,” Mr. Morse said. He said that high-cost oil producers such as Venezuela and Russia will also need to reduce their production before the market balances at, what he predicts will be, US$75 to US$80 per barrel oil prices by the end of next year.

 

 

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