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Peter Tertzakian

Peter Tertzakian

Peter is an economist, investment strategist, author and public speaker on issues vital to the future of energy. He has clocked over 30 years of…

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Are Canadian Oil Prices Set To Rebound?

Oil rig

“How’s the Canadian oil and gas industry doing?” a friend recently asked me.

People on the sidelines expect a positive answer, knowing that a barrel of oil now trades above $70 on global markets and 65-ish in Texas.

“Not bad,” I reply. “The top line numbers are improving.”

In fact, as a whole, the upstream oil and gas business is doing better than before. Added up, Canadian producers should pull in about $2 billion Canadian dollars a week in 2018, for a yearly total of CA$105 billion. That’s up 9 percent from last year, and 27 percent from the recent 2016 low of CA$82 billion (see Figure 1).

(Click to enlarge)

But I’m quick to point out that broad statistics about industry health are misleading and need qualifying.

“Yet it depends,” I continue to say, “on what you’re selling; where you’re located; who you’re selling to; and what your discounts are. And it depends on how you are deploying innovation to handle cost competition.”

After a brief pause, I muse, “It sounds a lot like the retail business, doesn’t it?” And then I add the drama: “It depends if you are talking about Amazon, or Sears Canada.”

As a side note, retail sales in Canada were close to CA$590 billion, up 7 percent year-over-year in 2017. But again, the big numbers are misleading.

Let’s face it, if you’re Amazon you’re smiling ear-to-ear. If you’re a hip boutique, selling high-margin clothing, you may be doing OK. If you’re selling cheap shoes on perpetual sale at the back of an expensive mall, you’re in trouble … and if you don’t have any online presence, you may as well put on a pair of those cheap sneakers and run.

That’s how it is in the oil and gas business: Just because headline prices are rising into the clouds doesn’t mean everything is universally peachy. Variations in performance are wide. For one thing, there are a lot of January sales. Price discounts in oil and gas are rife due to too much product being pushed out narrow doors. Related: Why Is The Shale Industry Still Not Profitable?

Lighter oils and condensates are the place to be in Canada. Productivity has increased dramatically over the past three years, helping to lower costs. Temporary price discounts in the three to five percent range are bothersome, but are being offset by rising global prices. Three-quarters of this year’s total CA$44 billion in spending — about CA$32 billion — will be spent on these high value plays.

On the other side of the oil business, heavy barrels are being heavily discounted. Depending on the day of the week, the market price for Western Canada Select (WCS) is trading 25 percent below normal. The discounts are due to another slug of oil sands production that’s come on line, clogging up pipelines, especially those that carry the heavy grades.

Heavy oil discounts should narrow once rail cars debottleneck the glut (again). Extra capacity from approved but yet-to-be-constructed pipelines like Keystone XL and Trans Mountain will help avoid congestion over the longer term. For now, it’s like waiting for another mall to be built.

What about natural gas? It’s a great Canadian product. In fact, our rocks are so good — among the best in the world — that we’re able to produce more volume than fidget spinners in a dollar store.

At the moment, too much gas is coming out of the ground from companies that are in the right, low-cost postal codes. Fire-sale market prices around CA$1.50/GJ represent a discount of 35 percent off the label. So, if you are a high-cost natural gas producer in the back of the basin with no contracted pipeline access — well, you may as well be selling shoes in the mall.

Historically, regional price discounts in oil and gas have always been temporary. Arbitrages don’t last when there are big dollars involved, so sale season will eventually end. In the meantime, discounts are painful. Yet, learning how to make a buck under price pressure is a skill that’s needed in this era of deflating manufacturing costs. Related: Tesla Looks To Get Ahead In Lithium Battle

Deflation is pervasive. Producing more stuff at progressively lower prices is happening everywhere. For fun, I picked up a 30-year-old Sears Canada catalog at a used bookstore. I flipped to the durable goods section and pointed out refrigerators to my friend. “Check it out,” I said, “a high-quality, 18-cubic foot fridge used to cost $1,249 in 1988.”

(Click to enlarge)

I challenged him to go to the Amazon website and find a similar fridge. With a few smartphone swipes, he replied, “An 18-cuber is still priced at $1,249 after three decades.”

“Sounds like the natural gas business;” I said, “little price appreciation since the 1980s,”

Price pressure. New technology. Changing processes. Changing market access and sales channels. Changing locations. Changing customers. And of course, changing regulations.

How is the oil and gas industry really doing? Like any other industry, the answer depends on who you ask.

By Peter Tertzakian for Oilprice.com

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  • Michael Shannon on January 31 2018 said:
    While Canada keeps electing leftist socialist losers their energy industry will be severely constrained. The only reason the envioro whackjobs like trudeau haven't killed it off entirely is they need the money to pay for all their socialist schemes.
  • Citizen Oil on February 01 2018 said:
    If the two approved pipelines, Keystone XL and Trans Mountain are not built because of NIMBY environmentalists , the Canadian oil and gas industry is finished. Justin Trudeau pretends he's for the industry and yet he wishes they'd fail in private. This boy is very bad for jobs and the economy ! Liberals know how to spend lots of money, they're just confused how it's made.
  • Ness on February 03 2018 said:
    Funny how these guys love to blame Justin. You have a Liberal and npd government both pushing for a pipeline at risk of hurting their support from grassroots voter. Harper had the power to ram thru northern gateway but he didn’t because he was Afraid to lose his bc seats. These oil cos have no one to blame but themselves They greatly expanded production and continue to do so without the infrastructure in place to take it away. It’s like building a bunch of houses with no guarantee of a road every being built to get you there. Then blame it on someone else when your home owners complaint Production over profit has also been the objective of North American oil industry. And investors have said enough is enough. Stop
    Over producing
  • Corvettekid on February 03 2018 said:
    I bet the 18-cubic fridge today has many more features and is much more energy-efficient than the one from 30 years ago, right ?
  • Philip on February 07 2018 said:
    Well put Nes. The conservatives had long serving governments both in Alberta and Ottawa without a pipeline. Now people are blaming Trudeau and Notley because they haven’t achieved a pipeline either after only a couple of years of trying.It’s the industry which has a big part of the blame by investing tens of billions into oil sands without guaranteed infrastructure. Then we had a government in Alberta that allowed uncontrolled growth which put a strain on schools, hospitals, etc. Peter Lougheed started the heritage fund in 1976 “ to save for the future, to strengthen or diversify the economy, and to improve the quality of life for Albertans.” Sits at 17 billion now, socialist Norway with roughly the same production since just passed one trillion in their fund.

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