Varcoe: Producers ponder return of $100 oil after OPEC+ production cut

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A shock manufacturing minimize by OPEC+ nations despatched crude costs hovering on Monday, sending Canadian power shares increased and fueling expectations that oil might hover round US$100 a barrel later this 12 months.

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The Group of the Petroleum Exporting Nations and its companions introduced on Sunday that they’ll minimize output by barely multiple million barrels per day (bpd) from subsequent month, with OPEC kingpin Saudi Arabia chopping manufacturing by 500,000 bpd.

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The group calls it a “precautionary measure aimed toward supporting the steadiness of the oil market.”

The information despatched costs increased for West Texas Intermediate (WTI) crude, which closed at $80.42 a barrel on Monday, up practically $5. It additionally marks a swift restoration from final month’s worth hunch, when benchmark US oil tumbled under $65 a barrel amid worldwide banking turmoil and considerations about its impact on power demand.

“It shocked the market. It actually wasn’t in anyone’s playbook,” Al Salazar, vice chairman of intelligence at power analytics agency Enverus, mentioned Monday.

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“With this minimize, it just about simply locks it in that we’ll hit $100 a barrel within the again half of the 12 months.”

That is the second manufacturing minimize by OPEC+ since final fall, because it introduced a two million bpd discount in manufacturing (from November) after costs fell from greater than $120 a barrel final summer time. The anticipated Russian oil manufacturing was additionally decreased by 500,000 barrels per day till the top of this 12 months.

Analysts anticipate oil costs to be increased this 12 months as demand will increase because the summer time driving season approaches. A number of years of underinvestment by world business have additionally restricted the sector’s skill to quickly improve output.

“This can be a good instance of the truth that you merely can not depend on the day-to-day costs of oil,” Birchcliff Vitality CEO Jeff Tonken mentioned of Monday’s worth improve.

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“For each producer it’s optimistic, as a result of now you’ll generate extra revenue. And that is good for the federal government of Canada and the province of Alberta as a result of they’ll generate extra royalties and extra taxes.

“So it is vitally optimistic. The query is, how lengthy will it final?”

Consulting firm Rystad Vitality predicts that the voluntary output minimize, if absolutely applied, will push Brent crude oil costs to hover round US$110 a barrel this summer time.

Nonetheless, a pointy rise in power costs is more likely to improve inflationary stress on the world economic system.

U.S. oil manufacturing is projected to rise by about 580,000 bpd this 12 months, however the U.S. business doesn’t have a lot further capability to make up the hole due to OPEC’s newest minimize, Salazar mentioned.

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Earlier than the weekend resolution, Enverus anticipated Brent oil costs to rise by round US$100 per barrel within the fourth quarter.

“It is positively at odds with what the US is making an attempt to do. It flies within the face of considerations about inflation and making an attempt to chill it down,” he mentioned.

“It actually units up an attention-grabbing 12 months (in 2024) as a result of OPEC might have to extend manufacturing subsequent 12 months to stop costs from overheating.”

For Canadian petroleum producers, the surprising resolution by the cartel means increased commodity costs and stronger money move ranges in 2023 – if these situations maintain.

Shares in oil sands producers jumped on Monday’s information, with Cenovus Vitality and MEG Vitality each up greater than eight p.c. Junior oil producer Gear Vitality climbed 11.7 p.c on the day, whereas Surge Vitality noticed its share worth rise by practically six p.c.

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Surge chief govt Paul Colborne mentioned the manufacturing minimize by OPEC nations ought to speed up the anticipated tightening of provide ranges and world demand for oil this 12 months, pushing costs in direction of $100 a barrel.

“There’s going to be large attracts on stock through the driving season and that is the true story right here,” mentioned Colborne, who expects WTI crude to common round $95 a barrel this 12 months.

“It is nuts, there’s nothing to sluggish it down.”

For Surge, each change of $1 per barrel over the course of the 12 months will increase its money move by about $8.7 million.

“We’ll simply hold paying down debt and doubtless hold bumping our dividend, however we’re not going to hurry out and do a bunch extra drilling,” Colborne mentioned.

Petroleum producers anticipated commodity costs to reasonable this 12 months after oil markets soared in early 2022 following Russia’s invasion of Ukraine.

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A survey final month of Canadian oil and fuel executives by Raymond James requested respondents the place they anticipated U.S. oil costs to be a 12 months from now — and the common outlook was $85 a barrel.

Almost two-thirds of executives mentioned they might use surprising free money move to pay down debt this 12 months, whereas 48 p.c would improve capital spending.

With weak pure fuel costs persevering with in North America and elevated volatility sweeping via oil markets, Tonken expects Canadian producers to be cautious about altering their plans for 2023.

“I do not assume you are going to see anybody begin drilling oil wells simply because the worth of (oil) went up $5 in a single day,” he mentioned.

“The concept that I believe you’ll hear from all producers is to be conservative over the subsequent 12 months and place themselves for progress – or for increased commodity costs – as we transfer into the longer term.”

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com