MDLNF - Oil Market Update: H1 2019 in Review
The first half of the year has been busy for the oil sector. US production has spiked, while other countries look to reduce output, and ongoing sanctions against Iran have created an air of volatility in the market.
Despite persistent instability in the oil and gas space, the price of Brent crude has gradually trended higher since hitting its half year low of US$53.80 a barrel in January. The story of West Texas crude (WTI) has been much the same as Brent crude, with WTI steadily climbing from its January low of US$45.41.
The current price of Brent crude is US$64.26 a barrel, and WTI is sitting at US$58.07 as of July 9, 2019.
Brent crude reached its half-year high of US$74.04 on April 22, and WTI achieved its six month high a day later at US$66.30.
Oil market update: Half-year review
Early in the year, Canadian analysts forecasted that prices would trend higher, and they have. However, the country is still facing hard issues around transporting both oil and gas beyond North America into the lucrative Asian and European markets, leading to several pipeline announcements over the last six months.
Moving supply isn’t the only issue plaguing the oil sector. Finding new prolific deposits to exploit in order to meet the growing energy needs of the world is also incredibly important.
According to the June oil market highlights report released by the Organization of Petroleum Producing Countries (OPEC), world oil demand is expected to rise by 1.14 million barrels per day (mbpd) for the remainder of 2019.
Some of that new demand will be met by unconventional offshore projects, like BHP’s (ASX:BHP,NYSE:BHP,LSE:BLT) US$1.3 billion Atlantis Phase 3 project located in the US Gulf of Mexico.
“The Atlantis Phase 3 project provides a competitive opportunity to deliver on our strategy to grow resources in tier 1 conventional deep-water assets. The project will further expand the Atlantis field and will provide cost-efficient, near-term volumes,” Steve Pastor, BHP’s president of operations petroleum, said in the announcement.
BHP wasn’t the only oil producer that advanced an offshore project this year. UK-based Hurricane Energy (LSE:HUR,OTC Pink:HRCXF) was able to produce its initial barrels of oil from a fractured basement field.
The project, located in the Lancaster field, is the country’s first basement reservoir to go into production on the continental shelf, a region of water to which the country controls the mineral rights.
While BHP and Hurricane were focused on getting their sites into production, OPEC and a select group of non-OPEC nations have implemented a 1.2 million bpd output cut since late 2018 in order to keep prices from sinking due to oversupply.
Despite international efforts to prevent an exorbitant supply glut, US President Donald Trump has repeatedly taken to twitter to urge OPEC to keep prices in check while he established sanctions on Iran and Venezuela, two OPEC members, and ramped up US production to record setting levels.
Oil market update: Supply and demand trends
Canada, which is the fourth largest producer of oil in the world with an output of 5,295,000 bpd in 2018, has had a rough start to the year. Ongoing pipeline woes paired with forecast reductions have pulled down the Canadian market.
“The first half of 2019 has been a difficult period for Canadian oil and gas producers, primarily due to concerns around adequate pipeline infrastructure and market access,” explained Mark Pinney, manager of natural gas and transportation for the Canadian Association of Petroleum Producers.
While Canadian output has grown by 331,000 bpd year-over-year, the country’s ability to transport its growing supply has not kept pace.
“We have already seen production exceed pipeline egress capacity from the basin and by the end of 2018 this led to high levels of pipeline apportionment and wide price differentials to North American benchmarks,” said Pinney. “In January, the Alberta Government imposed its oil curtailment program that was intended to reduce the high inventory levels of crude oil that had built up in the province and to encourage basis differentials to be more aligned with transportation costs and crude quality differences.”
Pipeline construction and expansion has been an ongoing concern in both Canada and the US. Last year, the Canadian government purchased the Kinder Morgan Canada (TSX:KML,OTC Pink:KMLGF) Trans Mountain (TMX) oil pipeline for C$4.5 billion in an effort to get the pipeline expansion approved and off the ground.
In mid-June, the Liberal government approved the Trans Mountain expansion, which is expected to triple the current pipelines capacity from 300,000 bpd to 890,000. However, it does come with a hefty construct price of C$6.8 billion.
“While the news on the TMX pipeline approval is good and should help increase activity in the sector in the medium to longer term, the short term remains difficult as it will take years for the expansion to be placed into service,” said Pinney.
Even though Alberta has tried to supplement its current export capacity by leasing 4,400 rail cars to ship crude, Pinney does not see this as a long-term solution to the transportation concerns plaguing the Canadian oil and gas sector.
“Rail will help but is not seen to be a comprehensive solution to long term market access. Pipelines remain the most efficient form of transportation,” he said. “In addition to TMX, the sector also requires approvals for (the Keystone pipeline) and Enbridge Line 3 replacement.”
TMX wasn’t the only pipeline making headlines over the last few months. TransCanada’s (TSX:TRP,NYSE:TRP) Keystone project, which is slated to carry crude oil from Hardisty, Alberta, to Steele City, Nebraska, received backing from the president again. It was the subject of a second presidential permit in April.
Trump has been trying to get the project approved despite former President Barack Obama scrapping the project during his tenure. If approved, the pipeline will allow Canadian crude to make it into US markets as well as the Gulf of Mexico for shipping.
Fears that Canadian prices could stumble further have impeded sector investment, while energy investment globally has grown.
In May, the Petroleum Services Association of Canada (PSAC) lowered its oil and gas well drilling activity forecast for 2019 for the second time this year, dropping its expected new well drills to 5,300 from 6,600.
This sentiment was echoed in a recent report from the Fraser Institute, noting that business investment is down across most sectors of the economy, especially mining and oil and gas.
“Too often, Canada’s declining business investment is dismissed as a byproduct of recent struggles in the oil and gas sector, but in fact there’s been a significant drop in investment across many sectors of the economy,” Steven Globerman, Fraser Institute senior fellow, stated in a press release. “Policymakers routinely underestimate how unattractive Canada has become to investors and businesses.”
As Pinney pointed out, the issue is a bit more complex than sheer lack of new investment. He noted that Alberta’s current curtailment, as well as the bottleneck in transport, is impacting sector growth.
“Drilling activity for crude oil has been lower this year compared to last, as producers’ confidence is impacted by ongoing market access constraints,” he said. “The need to remain within production limits mandated via curtailment program may also have impacted producer drilling activity.”
Oil market update: Q3 and beyond
Moving into the remainder of the year, global oil demand growth is projected to climb by 1.2 mbpd until the end of the year. Oil supply for the second half of 2019, is estimated to grow by 1.8 mbpd, a slight decrease from last year.
“The observed slowdown in the global economy in 1H19 will further be challenged in 2H19, mainly by mounting trade disputes, with the impact on oil demand growth remaining uncertain,” reads the OPEC report. “While growth in non-OPEC supply continues, the extent of additional production in key regions in 2H19 will mainly depend on volumes of start- and ramp-ups.”
This restrained forecast was reiterated by Pinney: “For the remainder of this year the sector will be consumed by ongoing challenges around lack of market access and the downward pressures on prices that result. Hope remains that in the longer term, with growing global demand for energy, the sector can recover and the resource base can be developed to its full potential with better market access.”
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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.
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