The American Petroleum Institute (API) recently blew away analyst crude draw predictions. In November, the API reported a draw of U.S. crude oil inventories, triple what was predicted by S&P Global Platts analysts. This has been great for oil prices generally, as North American oil producers rush to keep oil and gas fields pumping despite lagging prices.
Despite OPEC Cuts, North American Crude Production is Up
OPEC cut production by 1.8 million barrels per day back in January, and the cartel will be meeting in the coming days to discuss possible further cuts. Reactions to current and expected OPEC production cuts have pushed prices higher in North American oil markets as companies are encouraged to increase output.
U.S. crude is currently floating on a two-year high on the prospect of higher supply after rising 15 percent in just over a year. According to the Energy Information Administration, America now produces 9.66 million barrels per day, treading directly on the heels of top OPEC producers like Russia and Saudi Arabia. This trend shows no sign of reversing, as increased drilling activity in the U.S. indicates ongoing output growth. According to energy market analyst World Oil, U.S. drilling is expected to increase over 26% as America builds new wells to pump crude. Offshore oil rig count is increasing as well. Despite recent infrastructural challenges – including the highly-publicized leak in the Keystone XL Pipeline connecting the United States and Canadian oil suppliers – investors are positive on U.S. oil futures in the short term.
Canada’s oil markets are also quite bullish. Canadian oil production is expected to grow to over 5 million barrels per day in 2030, mostly due to robust oil sands production. While conventional oil production remains relatively stable, the Canadian Association of Petroleum Producers expects a 53 percent increase in oil sands production between 2016 and 2030. Increased Canadian oil supply will require a 39 percent increase in the nation’s pipeline infrastructure, so the robust growth projected in Canadian oil may depend on the success of proposed pipeline projects. However, with major pipelines like the Keystone XL the Trans Mountain Expansion Project already receiving regulatory approval, outlook is positive for Canadian oil supply.
OPEC Likely to Extend Production Cuts
The world’s attention is fixed on OPEC in anticipation of is meeting in Vienna later this week. However, OPEC’s attention may be on crude oil inventories in North America. OPEC members are concerned that world markets might actually be oversupplied, especially following the recent IEA report showing weak global crude demand. Increasing crude oil and gasoline inventories might encourage the cartel to take extreme measures to cut oversupply and push up the market price.
Industry analysts generally expect OPEC to keep the limits it imposed back in January, and perhaps even extending them for the next six to nine months. Led by oil heavyweight Saudi Arabia, OPEC has successfully cut supply over the past ten months. This success was largely driven by smaller member nations, like Angola and Qatar, as well as cooperation with several non-OPEC nations wishing to cut global crude supply. Collectively, 21 OPEC and non-OPEC are trying to cut crude supply by nearly 1.8 million barrels per day, and they have recently been relatively successful in meeting their targets.
It remains to be seen what OPEC will decide in its coming meeting and, perhaps more importantly, whether OPEC members will comply. OPEC has reported a high degree of confidence in member compliance with production cuts. Regardless, however, strong North American oil sands and shale production is set to give the cartel a run for its money. Political instability in OPEC member nations like Venezuela and Iraq causing potentially serious problems, might seriously undermine OPEC’s market power. Iraq has failed to meet OPEC production restrictions since they were passed at the beginning of the year. While Venezuela was able to cut production according to OPEC goals this year, it is taking heavy hits to its economy. As political and economic turmoil in these nations continues to worsen, one of OPEC’s largest members may find itself in a position where it lacks the degree of political and economic control necessary to enact oil production policies.
North American Oil Companies Can Offer Value in Volatile Markets
Taken altogether, a boom in North American supply and an inability to limit production in less politically and economically stable OPEC nations may undermine any production cuts the cartel seeks to enforce.
Canadian and American oil companies have been riding the rollercoaster of oil demand and production like the rest of the oil producing world. However, as reported by the Financial Post, some companies have come out ahead in the volatile crude markets. Analysts are predicting sluggish performance among Canadian energy stocks generally, but some energy companies are bucking the market trend. For example, financial analysts have picked Calgary-based Obsidian Energy as a potential winner for the informed investor. Obsidian has quickly bounced back from past regulatory compliance and management issues, and the stock is quickly rising as new leadership demonstrates the company’s potential value.
The news isn’t all good for Obsidian. National Bank Financial analyst Brian Milne has stated the company faces ongoing challenges “related to historical market perception,” but recent regulatory settlements have been “net positive in the sense that [a] resolution removes a black cloud from over the recently transformed, Obsidian Energy.” As a result, National has maintained Obsidian’s sector perform rating and $1.50 target price. Obsidian’s recent announcement of strong Q3 earnings and good financial projections for 2018 has gone even further to boost investor confidence.
Many analysts are speculating that OPEC may extend production cuts to maintain its market control, but the increasing activity in North America’s oil and gas markets has attracted investor’s attention. Crude oil prices react to geopolitical and economic events, making a reliable estimate nearly impossible to nail down in the mid- to long-term. However, non-OPEC nations are better isolated from the political and economic uncertainty that can undermine the cartel’s production restrictions. As a result, many investors are turning towards bullish North American energy companies to cope with risk in today’s volatile oil markets.