What Now for Canadian Oil Sands Producers?
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Earlier this week, TC Energy (TSX, NYSE: TRP) confirmed that it has officially nixed the Keystone XL Pipeline Project given President Biden’s revocation this past January of a critical permit for the pipeline’s completion. A completed Keystone XL would have given Canada’s oil sands producers a major additional outlet to reach U.S. refiners. What are their options now? One of Rigzone’s regular energy market-watchers discusses alternatives for linking Canadian producers with customers in the U.S. – and beyond – in this week’s installment of oil and gas market hits and misses. Read on for his and other insights in this review of recent market developments.
Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?
Jon Donnel, Managing Director, B. Riley Advisory Services: Onward and upward as WTI prices hit two-year highs crossing $70 per barrel, shrugging off a number of negative data points including U.S. product builds on lower demand to start driving season, headlines suggesting the lifting of sanctions against the former director of the National Iranian Oil Co., and the highest inflation numbers since 2008. The resilience in the commodity is a testament to the discipline of U.S. producers and OPEC+ and the continued reemergence of pent-up demand.
Tom Seng, Director – School of Energy Economics, Policy and Commerce, University of Tulsa’s Collins College of Business: WTI continues to trade in the $70s, a price level not seen since October 2018, as it appears headed for the third-straight weekly gain while Brent flirts with $72 on solid fundamentals. In addition to another weekly inventory draw, crude's rally gained momentum from forecasts for increasing demand posted by both OPEC and the International Energy Agency (IEA).
Concerns still linger over the increasing cases of COVID-19 in areas of Latin America and Asia, most notably India. However, the IEA believes the OPEC+ group will need to increase output to match the growing demand caused by the opening of more and more countries; but, the Paris-based agency doesn't see pre-virus consumption levels returning until next year. Meanwhile, OPEC foresees 2021 global oil demand to average be 96.6 million barrels per day (bpd) after rising to 99 million bpd in the second half of this year. They also lowered the 2020 pandemic demand loss from 9.4 million to 9.3 million bpd. The discipline exhibited by U.S. shale producers has kept supply levels below pre-pandemic levels, giving more control to OPEC+ in managing global output. Russian oil giant Rosneft (OTCMKTS: OJSCY) warned this week that there could be an oil supply deficit if the E&P industry rushes into the energy transition by shifting capital into carbon-reducing or emissions capturing projects at the sake of new production activities.
On the bearish side, Chinese crude imports fell to a five-month low in May and uncertainty exists over the ongoing talks between the U.S. and Iran over the latter's nuclear enrichment program. In addition, tensions between Israel and the Palestinians could erupt at any time causing Middle East turmoil.
Crude inventories continued to decline this week as refineries increased activity due to the start of the peak U.S. driving season. The Energy Information Administration’s (EIA) Weekly Petroleum Status Report indicated that commercial oil inventories decreased by 5.2 million barrels. Wall Street Journal analysts were calling for a 2.3-million-barrel drop while an S&P group forecasted a drop of 4.1 million barrels. The American Petroleum Institute reported that inventories were 2.1 million barrels lower. Total crude stored now sits at 474 million barrels, falling to 4% below the five-year average for this time of year. Refinery utilization rose 2.6% to 91.3%. Total motor gasoline inventories saw a substantial increase of 7 million barrels and are now back up to the five-year average. Distillates rose by 4.4 million barrels, 5% below the five-year average. Crude oil stocks at the key Cushing, Okla., hub rose 165,000 barrels to 45.7 million barrels, or 60% of capacity there. U.S. oil production increased by 200,000 bpd to 11 million bpd. Domestic U.S. crude supply has been above – or below – 11 million bpd for several weeks now. Additionally, there was another draw of about 1.3 million barrels from the Strategic Petroleum Reserve.
U.S. exports of crude reached 3.24 million bpd in April, according to the U.S. Census Bureau. But, Brent/WTI spreads are shrinking and currently stand at around -$2.30.
It appears that an alliance of Canadian oil sands producers, which has set a goal of zero greenhouse gas emissions by 2050, has been a little too late as the Biden administration made the final decision not to grant the international crossing permit for the Keystone XL Pipeline, killing that phase of the project. Future shipments of bitumen out of Alberta will now have to be by rail or the TransMountain pipeline project. The latter will allow Canada to export crude directly to Asia.
The Dow continues to hold above the 34,000 level while the S&P and NASDAQ are trading near their record highs this week. All three indices look to settle higher on the week. The U.S. dollar is rebounding after falling earlier in the week on inflationary government reports. May's Consumer Price Index rose 5% from a year earlier, putting core inflation at 3.8% year-on-year while real average weekly earnings fell 0.1%. The weaker dollar has helped fuel the crude price rally.
Natural gas continues to trade above $3 at almost winter-like levels as the weekly injection missed forecasts and as summer heat appears to be entering the picture. The EIA's Weekly Natural Gas Storage Report showed an injection of 98 billion cubic feet (Bcf) vs. analysts' forecasts calling for a gain of 100 Bcf and the 5-year average of 92 Bcf. Stored natural gas now stands at 2.4 trillion cubic feet (Tcf), 13.7% lower than last year and 2.2% below the five-year average. Presently, the market would need to average an injection of about 76 Bcf per week to hit 4 Tcf by the start of next winter. Supplies of natural gas increased to 93.3 Bcf per day (Bcfd) from 92.9 Bcfd the prior week. Total demand last week was 86.6 Bcfd, up from 84.1 Bcfd the prior week, with the main increase coming from the power generation sector. Exports to Mexico held at 6.5 Bcfd while exports of LNG were lower at 9.4 Bcfd.
Rigzone: What were some market surprises?
Donnel: One does not expect stocks to trade down on news of consolidation, but that is what we saw following the Independence (KKR) and Contango (MCF) merger that at first glance looked positive as two acquisition-focused entities were combining to increase scale and lower operating and capital costs. However, additional details of the structure, specifically a $53 million per year management fee and a 1.5% share of all future equity raises for an affiliate of KKR, took some shine off the deal and MCF was trading about 20% lower two days after the announcement. The “G” in ESG matters, especially given the history of the oil and gas industry.
Mark Le Dain, vice president of strategy with the oil and gas data firm Validere: Gasoline imports continue to surge. There is some seasonality to this, but they are likely coming in higher as decisions were made a few weeks ago to source excess gasoline in the event the Colonial Pipeline disruption was recurring.
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