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Casualties of War – Canada Suffers Amidst OPEC and US Shale Battle

The war between OPEC oil and US shale is not over with prices dropping even lower in November. OPEC have been flooding the American market with oil, which in turn has put pressure on neighbouring Canadian oil producers to sustain cost-effectiveness in the current climate.

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Insanity: doing the same thing over and over again and expecting different results. Einstein would love OPEC right now. Led by Saudi Arabia, it embarked on its all-out production battle with US shale drillers 17 months ago in a bid to wrestle back control of the market and increase prices. This month as al-Naimi claimed Saudi Arabia was only trying to stabilise the market, prices crashed beneath $45pb mark, far lower than what most of OPEC members require in order to balance their state budgets.

Conspiracy theories are rife, with one interesting idea coming from Euan Mearns on last week: “Is it a battle between OPEC and US shale? Or a battle by the USA and Saudi Arabia against Iran and Russia?” He believes it’s the former and that OPEC/Saudi can’t beat the States.

That’s not preventing OPEC from trying. It’s flooding the US with imported oil – this month saw the largest monthly increase of Iraqi oil in the US since 2012 according to Bloomberg – causing the Energy Information Administration to downgrade their 2016 projections for America’s domestic oil production. That means domestic rig closures and consequently more imports. “In the longer term, we expect the U.S. to have to increase imports next year by some 500,000 barrels to 800,000 barrels a day year on year,” said Steve Sawyer, the head of refining at London based consultant FGE. “Given our projections for Iraqi output, it could well come from here.”

Luckily for the US, although it is the world’s biggest oil producer, the industry as it relates to the rest of US output is actually very small – just 2.4% of US GDP in fact – whereas OPEC member countries struggle to cope with low oil prices.

It’s not just the States which is being affected. As Bloomberg put it – “OPEC took a swing at US shale and knocked down Canada.” The last year and a half has put considerable pressure on Canadian producers who are finding it difficult to cut the cost of removing bitumen from the oil sands, as well as trying to make their other wells as efficient as their nearest neighbours. In January 2014 production from Alberta was around 150,000 bpd higher than from the Permian Basin, the largest shale site. In July 2015 shale output had rocketed to almost double the Albertan output. Canada is sadly nothing more than a mere casualty in the race to the bottom. “OPEC wants to hinder shale from its strong growth trajectory but there are higher-cost producers, such as in the oil sands of Canada, that are in the line of fire,” said Peter Pulikkan, an analyst at BI in New York. “Shale will eventually be impacted but it’s not the first on the list.”

The IEA in its most recent report said a “more prolonged period of lower oil prices cannot be ruled out.” It’s estimating demand will drop from 1.8m bpd in 2015 to 1.2m bpd in 2016, “because the global stock building, though slowing, continues to remain significantly above the historical average.” It warns that there is by no means any guarantee of longer-term oil market security, but does predict eventual price climbing stating that “the process of adjustment in the oil market is rarely a smooth one, but, in our central scenario, the market rebalances at $80/b in 2020, with further increases in price thereafter.”

There is an easy get out for everyone here – a production cut. It could happen when OPEC next meet on December 4th. It’s unlikely though and it’s hard to understand why, unless there is an ulterior motive. All theories, as usual, welcome to PC HQ.