Varcoe: Saudi oil attack bolsters crude and share prices, but highlights Canada s limitations
|calgaryherald.com 17 Sep 2019 at 09:27|
A weekend attack on the world’s largest oil processing facilities in Saudi Arabia brought the paddles out, re-introducing an old factor — geopolitical risk — into the energy mix.
It didn’t take long for markets to react, with U.S. benchmark oil prices surging by more than 14 per cent on Monday. In Canada, energy stocks also took off.
The S&P/TSX Capped Energy Index jumped by 9.3 per cent, regaining a big chunk of ground lost earlier in the year. Shares in Canadian Natural Resources jumped 13 per cent on the Toronto Stock Exchange, Baytex Energy rose almost 17 per cent and MEG Energy climbed 14 per cent.
In the days and weeks ahead, it’s an open question just how much impact the attack on critical energy infrastructure in Saudi Arabia — one of the world’s largest and most influential petroleum producers — will have on the Canadian sector.
Companies and analysts say the fallout will depend on how long the 5.7 million barrels per day (bpd) of affected production remains offline, and if the conflict escalates in the coming days.
“Everybody will get a little extra cash flow, but I don’t think you’ll see a bunch of companies forecast higher prices for next year yet,” said Tamarack Valley Energy CEO Brian Schmidt, whose company’s share price climbed 11 per cent on Monday.
“I’m not banking on it … I don’t think any junior or any company of our size is really going to be changing their 2020 plans because of this.”
While Canada is the world’s fourth-largest oil producer and has the world’s third-largest crude reserves, domestic companies are limited in their ability to increase exports and fill any gaps created by Saturday’s attack on Saudi Arabia’s Abqaiq oil processing centre.
Since January, the provincial government has curtailed production, while export pipelines are full and crude-by-rail shipments have been slow to pick up.
But that doesn’t mean a sudden reduction in global oil output won’t have an impact.
“It will mean higher prices and that means more revenue and cash flow for producers of oil. We think those producers are still going to be very guarded with what they do with the cash,” said Peter Tertzakian, executive director of ARC Energy Research Institute.
The immediate consequences of Saturday’s attack — rising oil markets and share prices — serve as a reminder that global oil markets have long been influenced by geopolitical risk factors, even if oil markets have discounted such issues in recent years.
Tertzakian noted the last time the world saw this much oil production knocked offline was four decades ago, following the 1979 Iranian revolution.
“In many ways, I think we’ve also lost the lessons that we learned back then … that sudden scarcity wakes people up,” he added.
It’s unclear precisely where Saturday’s attack originated from, as the U.S. pointed the finger at Iran, while Iranian-backed Houthi forces in Yemen have claimed responsibility. The drone attack highlights the potential for future assaults on Saudi oil infrastructure.
“The key lesson learned from this weekend is simply one of vulnerability,” said Michael Tran, managing director of global energy strategy for RBC Capital Markets in New York.
“Even if some production can come back on in the near term, a geopolitical fear premium needs to be re-injected back into the market.”
The fear premium returned with a flourish on Monday. In New York, West Texas Intermediate crude jumped more than $8 to close at US$62.90 a barrel.
Saudi authorities said some production could come back on line quickly, although it’s unclear exactly how much oil will remain sidelined or for how long.
The possibility of an escalating conflict in the Middle East also can’t be ignored, and is now being factored into the equation.
“The market is really on edge right now,” said Scotiabank commodities economist Rory Johnston.
A satellite image shows an apparent drone strike on an Aramco oil facility in Abqaiq, Saudi Arabia Saturday. Planet Labs Inc/Handout
Johnston said his base case scenario is it will take somewhere between four to six weeks for full Saudi production to come back on line. He expects benchmark U.S. crude will bounce up by $5 to $10 a barrel from his current price forecast of oil in the mid $50-a-barrel range.
Saudi Arabia does have storage facilities that will help fill the gap for its customers in the short term, and the U.S. is also looking to release crude from its Strategic Petroleum Reserves.
While Alberta has the capacity to significantly boost oil output over time, several factors — including a lack of pipelines and the province’s program to restrict production — stand in the way.
“It really once again highlights that the Canadian sector could theoretically ramp up production to send more crude down south, except for the fact that we don’t have pipelines and capacity to do so,” said Johnston.
Other supply problems have cropped up in recent years, such as the sharp reduction of Venezuelan heavy crude exports into the U.S., creating opportunities for Canada’s producers, but they couldn’t be met because of ongoing pipeline bottlenecks.
“We are missing that boat because we don’t have the infrastructure,” said Tran.
And while Canadian companies aren’t likely to increase spending in the coming weeks because of higher prices, analysts say the attack could help address another issue facing the Canadian oil sector: investor apathy toward the sector.
Oil stocks have largely been out of favour recently, with the S&P/TSX Capped Energy Index falling by more than 11 per cent from the start of the year until the end of August.
Tertzakian believes the attack on Saudi’s energy production should act as a catalyst for Canadian petroleum producers, if higher oil prices are sustained.
“Canadian energy is just so unloved and so de-rated, if anything, (this) should have a re-rating effect,” said analyst Phil Skolnick of Eight Capital in New York.