The vast majority of Canadian oil production has bounced back since the market nosedived in response to the COVID-19 pandemic earlier this year, with a slight uptick in oil price forecasts providing a glimmer of hope for the battered energy sector.
Western Canada had cut its oil production by close to one million barrels a day by mid-May, because of record low oil prices and demand. Since then, producers have brought 700,000 barrels back online, according to the latest data from the Canada Energy Regulator.
The increased oil production comes alongside a rise in demand, which has helped bring down the amount of crude and refined products languishing in storage. Right now, that rise in demand has caused a slight increase in prices, but that could fall apart if a serious second wave results in the kind of global lockdowns instituted at the beginning of the pandemic.
In a revised oil price forecast this week, ratings agency DBRS Morningstar pointed out production cuts by members of OPEC+ and other countries (notably U.S. shale) have helped “significantly reduce the overhang of global crude oil inventories, providing support to a crude oil price recovery” from historic lows in April, when oil prices plunged well below zero.
“However, global oil inventories remain 5%-7% above the five-year average, and the overhang continues to weigh on pricing,” the agency wrote.
Laura Lau, the chief investment officer at Toronto-based Brompton Funds, said while there’s a good chance OPEC will enforce the production record cuts it agreed to in April in a bid to stabilize prices, there are no guarantees politically unstable countries that rely on oil revenues will stick to the plan.
Even so, she said, the biggest unknown comes down to demand.
While diesel and gasoline are faring better than expected as the contagion leads people to choose to drive rather than take public transit, refiners make the most money off jet fuel, she said. But with a second COVID-19 wave hammering Europe and other countries, there’s no telling when flights will pick up again.
Oil consumption will eventually increase again, she said, but “it will still be a little while.”
"That’s the biggest question mark – how much and when?” she said.
Ultimately, DBRS Morningstar this week raised its 2020 forecast for Western Texas Intermediate (WTI) crude oil – one of the main global benchmarks – from an average of US$32 per barrel to US$40. Longer term, it maintained its WTI pricing forecast of between US$50 to US$60 per barrel by 2022, and a Western Canadian Select benchmark price of US$35 by the same year.
With the global resurgence of the coronavirus and the reintroduction of economic restrictions in key oil-consuming countries, it added, “the recovery of crude oil demand and pricing could prove fleeting.”
“To offset weak demand, shrink inventory, and support crude oil prices, we think actions by OPEC+ to materially constrain production are necessary,” it wrote.
In a Thursday research note, the Bank of Nova Scotia also pointed to the uncertainty of short-term oil prices because of the effects of the lingering pandemic. Still, it believes falling inventories combined with a potential increase in demand will boost prices into year-end.
“Persistent under-supply resulting from production cutbacks, dramatically slowed drilling activity, and gradually improving demand has whittled away much of the inventory overhang built up during the pandemic,” it wrote, with storage levels now in line with mid-October in previous years.
For investors, it all adds up to what Ms. Lau has heard called a “dash for trash.” Oil and gas stocks have been “left for dead” in 2020, she said, but there’s talk of a rally.
“Could it happen? Yes, because everything can’t go to zero,” she said.
“This is the opportunity to make big money. If you didn’t buy big in March, then this is your chance.”
DBRS Morningstar says the current WTI price is “well below” the threshold most producers need to justify increased spending on new oil developments or brownfield expansions, although underlying uncertainty around oil demand has already led to widespread capital spending and job cuts in the patch.
Companies such as Suncor Energy Inc., TC Energy Corp., Enbridge Inc. and Royal Dutch Shell PLC have already made moves to slash their work forces, and on Wednesday, Exxon Mobil Corp. chief executive Darren Woods told employees in an e-mail the company expects to unveil job cuts in the United States and Canada. The COVID-19 pandemic has cut oil demand by about 20 per cent, he said, delivering a “devastating impact” on the oil business.
With a report from Reuters
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.