WSJ: Why Canada and Brazil are hurting market balancing efforts
May 18, 2017 – Mary Schimke, Energy Media Group
No one really thinks about how the “little guys” affect the effort to rebalance the oil market. Today, the Wall Street Journal reported that a “wave of new petroleum production from countries like Canada and Brazil is adding a new problem for oil traders.” The WSJ notes that the two countries are the seventh and 10th largest oil suppliers, and production in these two countries is growing fast. While they might not be “little,” production is overall far less than countries like the United States, Russia and Saudi Arabia. According to EIA data, in 2016, Canada ranked sixth in overall oil production while Brazil didn’t even make the top ten.
In addition to Canada and Brazil, the U.K. and Norway are also producing more and pose a concern at the meeting next week in Vienna of the Organization of Petroleum Exporting Countries (OPEC), according to the WSJ.
Last year, OPEC agreed to cut production in order to help balance the markets and raise oil prices back into profitability. The 13 countries of OPEC plus 11 non-OPEC countries, such as Russia, pledged cuts of 1.8 million barrels per day (bpd). The deal is expected to extend to March of 2018, reports Reuters.
While OPEC countries continue to make pledges to cut production, other oil-producing nations have taken advantage of the gap in the market. Today, Reuters also reported that oil tankers carrying around 10 million barrels of U.S. crude are en route to Asia. The OPEC production cuts, if extended, may be a big advantage to U.S. producers, since the premium for Brent crude over WTI continues to widen.
However, the Doug King, chief investment officer at RCMA Asset Management and manager of the company’s Merchant Commodity hedge fund, told the WSJ that while everyone is focusing on increased production in the shale regions of the United States, increased production by smaller producers, like Canada and Brazil, are a factor “that people seem to overlook.”
While the amount of production from these countries might seem significant, every extra bit of oil on the market contributes to the persistent oil glut that’s keeping prices from rising.
In Canada, says the Journal, output is expected to hit an all-time high this year at 4.7 million barrels a day. Brazil , with as much as 50 billion barrels of recoverable resources, is expected to grow by 212,000 barrels a day to reach 2.8 million barrels per day.
It’s a vicious cycle. If prices go up, production will increase and feed the glut. The prices will then drop, and countries like Canada and Brazil will, again, struggle to survive.