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Should oil prices drop to $30 or lower in 2016, Russia's economy would be pushed to depths that would threaten the nation’s financial system. With OPEC likely to stick with its strategy of defending market share by maintaining output and driving down higher-cost production elsewhere, a lower oil price remains Russia's biggest near term threat. Interestingly, the Russian central bank recently estimated in a stress-case scenario, with crude below $40 in 2016-2018, the economy will contract 5% or more next year and price growth may be at 7%-9% (raising the risk of inflation and financial instability). With such a bleak potential 2016 outlook, it will be interesting to see if Russia tries to strike a deal with Saudi Arabia to jointly lower production and shore-up the global oil price. One wonders how long both Saudi Arabia, Russia and the OPEC countries will continue to tolerate a depressed oil price.
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With the next OPEC meeting fast approaching (Dec 4th), the oil crash is fanning the flames of revolt against Saudi Arabia inside the walls of OPEC. Recent news suggests that the smaller OPEC countries including Algeria, Angola, Ecuador, Nigeria and Venezuela are begging the Saudis to shift strategy (i.e. keeping oil prices low so that they can squeeze out American shale oil producers and regain market share). Notably, a number of the smaller OPEC members have called for a price floor or a cut in oil production. Should the Saudi's continue to maintain the status quo on oil production (which is likely), the deep dissension within OPEC could threaten to dismantle the cartel. Overall, OPEC failed to see the U.S. shale revolution coming and now it lacks appealing options to respond to the resulting global oil glut.
Interesting thesis right now that the recent Paris attacks, as well as the downing of a Russian airliner in Egypt and bombings in Lebanon, could move Saudi, Russia and Iran closer together in an attempt to stabilize Syria. Notably, the Saudis have been punishing Russia and Iran in particular because these countries have publicly backed the Assad government in Syria. If that ends, if they all come together and cut a deal, this could end the Saudi overproduction of oil to a degree. Who knows if this scenario plays out, but it does speak to just how important geopolitical events are in affecting the global price of oil.
Not surprisingly, U.S. President Barack Obama rejected TransCanada's proposed Keystone XL pipeline today citing that the pipeline would not make a meaningful long term contribution to the U.S. economy. The 1,900 kilometer pipeline would have carried 800,000 barrels a day of oil from the Alberta Oilsands to refineries on the U.S. Gulf Coast (almost a quarter of all of Canada's oil exports). Given the review process for the pipeline has taken over seven years and knowing the Obama administrations hard stance on climate change, its not a surprise this administration rejected the pipeline. That said, TransCanada does plan to challenge this decision in court. Further, the project will likely get a fresh look in 2017 if a republican wins the White House and invites TransCanada to reapply. Although Keystone is dead for now, Obama's rejection won't likely be the last word on the project. In terms of a read-through for Canadian energy companies, this decision is clearly negative for Oilsands producers including companies such as Syncrude, Suncor, Shell, Canadian Oil Sands, Canadian Natural Resources, etc. This decision is also negative for services companies who derive a large portion of their revenue from the Oilsands, mainly the camps companies Horizon North and Black Diamond.
Interesting report from Sanford C. Bernstein & Co. suggesting M&A likely to accelerate into 2016 with recovery in crude to follow. Potential buyers could include National oil companies in Asia (PetroChina Co.) and India (Oil & Natural Gas Corp.). Possible targets could include Occidental Petroleum Corp., Devon Energy Corp., Genel Energy Plc and InterOil Corp., according to the report. A few recent examples of increased M&A include Australia’s Santos rejecting a A$6.88 US-per-share offer from Scepter Partners in October and Oil Search Ltd. in September rejecting an $8-billion US bid from Woodside Petroleum Ltd. In Canada, we saw Canadian Oil Sands Ltd. (the largest owner of Syncrude) recently state that it is considering alternatives to Suncor Energy Inc.’s $4.3-billion hostile takeover bid and has already had interest from possible suitors. Also, PetroChina and China Petroleum & Chemical Corp (Asia’s largest refiner) recently signaled that they are both looking at overseas acquisitions.
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Jason SawatzkyA Canadian Energy expert Archives
October 2020
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