» Editorial
PAGE 4 April/May 2018 « BLACK GOLD
Crude prices to strengthen through 2019
By Vincent Lauerman, Daily Oil Bulletin International benchmark crude prices played out basically as expected by Geopolitics Central (GPC) in the first quarter of the year, with a few interesting twists on the market fundamentals front and growing signs of ongoing Russia-OPEC co-operation encouraging us to maintain our current short-term outlook – albeit with an adjustment to the trajectory of crude prices through the end of 2019. GPC is forecasting spot WTI to average US$65/bbl in 2018, compared to roughly US$63 in the first quarter, and US$70/bbl next year. In our last quarterly update, we argued strong oil market fundamentals and widespread geopolitical concerns would drive spot WTI to US$70/bbl by mid-year, before the focus of market players shifted to the scheduled unwinding of the 1.8 million bbl/d OPEC/non-OPEC pact and potential implications of rapidly rising U.S. light tight oil (LTO) production. WTI was projected to drop back below US$65/bbl by the end of the year, before increasing to US$75/bbl through 2019 on rising geopolitical disruptions to supply and solid market fundamentals. The primary reason for GPC’s relatively bullish short — and medium — term oil price outlook has been our expectation of ongoing oil market co-operation between Saudi Arabia and Russia, on an as need basis. OPEC kingpin Saudi Arabia needs relatively high crude prices for a successful initial public offering (IPO) of a five per cent stake in Saudi Aramco in late 2018 or early 2019 and to help finance the kingdom’s economic transition under Vision 2030 thereafter. Non-OPEC kingpin Russia needs higher crude — and crude-indexed natural gas — prices to finance its junior partner role in the New Cold War against the West. In late February (Future Of OPEC And Oil Prices), for example, GPC wrote: “Saudi Arabia and Russia — formerly arch-foes, especially in the days of the godless USSR — have forged a strong diplomatic and economic relationship, including numerous bilateral investment agreements in the oil and gas sphere, since the original agreement between OPEC and 12 non-OPEC countries to cut crude production in December 2016. This new relationship between the two oil kingpins likely foreshadows ongoing co-operation between OPEC, Russia and some other significant non-OPEC oil exporters in an attempt to maximize crude prices and revenue as the world gradually transitions to a low-carbon world.” But, frankly, GPC was surprised by the timing of Crown Prince Mohammad’s announcement of potential long-term oil market co-operation between Saudi Arabia and Russia, which in turn has impacted our outlook for the trajectory of crude prices in the short term. On March 26, during an interview with Reuters, Saudi Arabia’s de facto leader said Riyadh and Moscow had agreed in principle to a 10 to 20-year arrangement to control world oil supplies, with the details still to be determined. Two days later the Secretary General of OPEC, Mohammad Barkindo, acknowledged that the cartel is seeking “very longterm” co-operation with other crude exporters. This was confirmed on April 3, when Russian Energy Minister Alexander Novak said OPEC and non-OPEC exporters may set up a joint organization for co-operation once current oil output curbs expire at the end of this year. GPC is now forecasting international benchmark crude prices to gradually increase between now and the end of 2019. In terms of interesting twists on the fundamentals front, U.S. oil production growth was stronger than anticipated by GPC in the first quarter and the collapse in Venezuelan crude output even more precipitous. Based on preliminary data, U.S. oil production — including NGLs and biofuels — gained a whopping 1.71 million bbls/d year-on-year to a record 16.41 million bbls/d in the first quarter, with growth stronger in March than January. This has led us to increase projected growth in U.S. oil output for the year to 1.90 million bbls/d, compared to our previous forecast of 1.34 million bbls/d — and a record annual increase of 1.75 million bbls/d in 2014 that led to Saudi Arabia’s 2014-16 oil price war in an ill-fated attempt to discipline U.S. LTO producers. Growth in U.S. oil output for next year is held steady at 1.54 million bbls/d. Despite these adjustments to U.S. oil production and Venezuelan crude output, GPC is continuing to project global oil consumption to exceed global supply by 500,bbls/d in 2018, pushing global inventories below “normal” levels, and the world oil market to be in balance next year. Global oil consumption is expected to increase a robust 1.52 million bbls/d to 100.02 million bbls/d this year, and another 1.22 million bbls/d in 2019. If not for the budding trade war between the U.S. and China, and its potential negative impact on global economic growth, GPC would have upped our projection for global oil consumption growth, especially for next year. Non-OPEC supply is now forecast to increase 2.14 million bbls/d in 2018, and OPEC supply to decline by 570,000 bbls/d — compared to 1.58 million bbls/d and 160,000 bbls/d previously — with Venezuela accounting for most of OPEC’s decline and Saudi Arabia cutting more than its agreed 486,000 bbls/d to make up the difference to provide additional support for crude prices. Next year, OPEC supply is forecast to increase 240,000 bbls/d, whether the cartel’s 1.2 million bbls/d production pact comes to an end or not, and non-OPEC supply to increase 1.48 million bbls/d. GPC is continuing to assume 1 million bbls/d of additional OPEC crude will go offline for political reasons, with Venezuela now accounting for half this amount. As a result, OPEC’s unplanned outages will total 2.95 million bbls/d in 2019, and spare capacity a mere 1.28 million bbls/d, leaving relatively little crude available in case of emergency, and hence, upside risk to our crude oil price outlook.
Editorial:
Oil industry caught between rock and hard place
T
he Western Canadian oil and gas industry is caught between two ideologies as the ongoing saga of the TransMountain pipeline continues, without resolution, and the industry will end up being the losers as the parent company, Kinder Morgan, seemingly is giving up (for the time being, anyway). The ideologies in question range from the uber-left-wing NDP government of B.C., which is heavily influenced by their Green Party components to ignore all common sense, the economy and even the federal government and the National Energy Board in their obstinance, to that of the federal Liberals, who are at odds with their left-wing brethren in insisting the pipeline is going to be built, somehow. The Liberals seem to want to placate their environmental brethren, and also the petroleum industry and the western provinces which are governed by an odd mix of NDP in oil-rich Alberta and the conservative Saskatchewan Party in Saskatchewan, and the Progressive Conservatives rule in Manitoba. Most curious of all is the fight between the two NDP governments in B.C. and Alberta, who are butting heads over the pipeline project, mostly because Alberta stands to lose a
lot without the pipeline, and therefore a lot of oil revenue if the province’s oil sector takes a major hit as a result of the obstinance of the B.C. government. The oddity of this situation deepens as one realizes that the right-wing Saskatchewan party is backing the Notley government in Alberta as they push for a positive resolution in the pipeline issue. The Trudeau government is the one that holds the hammer, so to speak, and has the federal power to make the pipeline happen. Their regulatory body has approved the pipeline, as have the Liberals, so it is up to them to actually step forward and act like they are actually the ones in charge. If they do not, the effect will be a shift in the balance of power that may impact on many other levels and in other sectors, if a province can show themselves able to supercede the authority of the federal government. This is not how Canada’s system of government is set up, where a province can refuse a federally-approved project from going ahead. There are ways for the federal authorities to mitigate the concerns of the B.C. government, but most importantly, this project needs to go forward, for the good of this country.
Volume 2
Issue 2
Rick Major, Publisher Andrea Corrigan, Advertising Sales Manager Black Gold is published by the Weyburn Review and issued at the office of publication, 904 East Avenue, Weyburn, Saskatchewan. Mailing address: Box 400, Weyburn, SK S4H 2K4. The Weyburn Review is owned and operated by Prairie Newspaper Group LP, a subsidiary of Glacier Ventures International Corp. The Weyburn Review is a member of the Canadian Community Newspapers Association, the Saskatchewan Weekly Newspapers Association and Canadian Media Circulation Audit.
Greg Nikkel, Editor NEWS DEPARTMENT Phone 306-842-6955 Email: editor@weyburnreview.com ADVERTISING DEPARTMENT Phone 306-842-7487 Email: production@weyburnreview.com