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North America’s crude market is increasingly diverging from the international scene, as rising U.S. production and weak demand pose long-term challenges for Canadian-based oil companies.
The U.S. is forecast to lead the non-OPEC world in crude production this year, with Canada not far behind. But that surge in supply is splashing against constraints in pipeline and refining capacity, and against a “peak demand” scenario in which U.S. consumption is not expected to return to the 1985 high water mark any time soon.
That stands in sharp contrast to the international crude market. Globally, high-growth emerging markets like China are driving demand higher, while new production capacity is increasingly concentrated in the hands of a few Persian Gulf states. Geopolitical risks – like the standoff over Iran’s nuclear ambitions – add strain to a fundamentally tight market.
The result is a sharp disconnect between international oil prices and what U.S. and Canadian producers can get for their crude, a divergence that will widen if refiners and pipeline companies fail to keep up with rising production.
Some analysts believe the growth in production in North America will continue to exceed market expectations and will swamp the mid-continental region with oil, driving down the benchmark U.S. crude, West Texas intermediate, and forcing Canadian producers to accept steep discounts on WTI prices (CL-FT106.590.310.29%).
Though buoyed recently by signs of U.S. economic growth, WTI prices remain $17 (U.S.) a barrel below North Sea Brent. Canadian price discounts against WTI are well above average, though they narrowed somewhat after Canadian Natural Resources Ltd. (CNQ-T38.180.320.85%) said last week its unplanned shutdown at the 100,000-barrel-per-day Horizon oil sands project would last until the end of March.
The threat of long-term price discounts poses a risk not only to the Canadian companies – whose oil sands projects have some of the highest costs per barrel in the world – but also to provinces such as Alberta and Saskatchewan which depend heavily on price-based royalties for their budgetary revenues.
North American oil production is witnessing a resurgence that many have compared to the shale gas boom that fundamentally changed the continental energy picture. Indeed, the explosion of “tight, light oil” production – such as North Dakota’s Bakken play – relies on the same high-tech drilling and hydraulic fracturing techniques that unlocked shale gas.
Combined with lower demand and increased biofuel production, growth in oil output has resulted in a reduction of U.S. imports to 8 million barrels per day at the end of 2011, from 13 million barrels per day in mid-2007. Imports as a percentage of U.S. demand dropped to 45 per cent last year, from 60 per cent in 2005.
In recent report, Citigroup analysts forecast that additional tight oil production could add as much as 3 million barrels per day to U.S. supply by 2020, with the Gulf of Mexico output climbing by another 2 million barrels per day.
For the rest of this article, please go to the Globe and Mail website: http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/shale-oil-boom-drives-down-prices-versus-rest-of-world/article2343532/