Kenneth Brownof The Crossroads
The price of oil went on a steady decline starting last fall and an expert says trade talks between two world powers have driven a slight rebound in the price.
According to Bloomberg, the West Texas Intermediate (WTI) price of oil was sitting at US$54.04 per barrel as of Wednesday morning. The international Brent price of oil was at US$62.64 per barrel at that time. The WTI price has rebounded since the end of 2018 after falling below $50 per barrel.
The WTI price of oil had reached as high as about $75 per barrel early in October. The www.fedprimerate.com website posts the closing WTI price at the end of each week and for the week ending on Oct. 5, the WTI price had reached $74.34 per barrel.
In weeks to follow, the WTI price had dropped steadily by the end of each week. The price dropped to $71.34 per barrel for the week ending on Oct. 12 and the price hit its lowest price to end a week for the week closing on Dec. 28 when the WTI price dropped to $45.33 per barrel.
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The WTI price for the week closing on Jan. 11 climbed back to above $50 when it reached $51.59 per barrel and the WTI price closed the week of Feb. 1 at $55.26 per barrel. An economics expert has attributed the slight rebound to the resumption of trade talks between the United States and China.
Saudi Arabia, a member of the Organization of the Petroleum Exporting Countries (OPEC), has the world’s largest oil reserves. The country’s decisions have a big impact on the price of oil and the country has been decreasing oil exports since the start of 2019.
It was reported near the beginning of 2019 that Saudi Arabia planned to cut its output by 800,000 barrels per day (bpd) in January, and by an additional 100,000 bpd in February. Saudi Arabia was exporting eight million bpd in November.
Furthermore, it was announced after an OPEC meeting in December that the organization and its allies would cut their combined oil exports by 1.2 million bpd starting in January to help shore up the sliding price of oil. While the cuts are likely to have an impact, the expert says they are not the main factor for the rebound.
Dr. Sam Gamtessa, a professor of economics at the University of Regina, said early in January the expectations of an improved economy based on the resumption of trade talks between the U.S. and China have had the biggest impact on oil prices.
“The recent impact of what we’ve seen in January came from that optimism about the economy,” Gamtessa said, recognizing that decisions made by OPEC members are often focused on market share rather than the price of oil.
He noted that the expectation is OPEC producing nations will increase supply as soon as the price of oil increases in an effort to drive out shale-based producers in the U.S., so they are trying to increase their share in export markets. The recent decision by OPEC to decrease exports is related to the price of oil.
Gamtessa said the crude oil futures market takes into account an expectation that OPEC members will increase production and exports after the price increases, so it is why he believes the announcement by the Saudis was not enough to drive prices upward on its own.
“I don’t believe that these Saudi Arabia cuts are the primary reason why oil prices have increased,” he said, recognizing that he believes a combination of factors such as more demand due to the increased confidence in the economy are helping to drive the slight price rebound to start 2019.
The expert said Israel’s production has decreased amid the ongoing international crisis in the country, and he does not believe it is getting enough credit for a rebound in the prices. Israel has halted its production, he said.
It was recognized by Gamtessa that the long, drawn out slide of oil prices that began in 2014 was driven by a decision by the U.S. to increase its crude oil experts. Saudi Arabia chose to maintain high production levels to drive down the price of oil to eliminate U.S. competitors.
He noted that once enough U.S. producers had shut down operations, the price of oil started to increase to levels seen in the summer and early fall of 2018. Gamtessa said Iran has also slowed its production due to economic sanctions and it has made an impact.
Canada sells its oil to the U.S. at a discounted price know as the Western Canadian Standard price. The two main hurdles for Canadian producers are the high cost of production and the lack of pipelines to move oil to market, Gamtessa said.
“These two factors will always make life difficult for our oil producers,” he said, recognizing that oil moves to slowly by rail due to the demand to move agricultural products and it causes a transportation bottleneck that could be solved by building pipelines to open up markets.
Ben Brunnen, vice-president of oil sands and fiscal policy for the Canadian Association of Petroleum Producers (CAPP), said the price of oil drives investment by oil producers and the break even prices for conventional oil producers are different depending on the oil play and the type of production.
He noted that the break even price in the Bakken shale play is between $30 to $40 range depending on the reservoir, but the break even for other Bakken reservoirs is in the $50 to $60 range. The oil sands break even price ranges from $40 to $60.
According to Brunnen, producers are able to make investments and generate profitable returns in the current WTI price environment, but “they just have to pick their spots.” He said the Viking oil play is more mature and it has been depleted more, so the break even price is higher than in other plays. He added that market access is paramount to Canadian producers have the best possible access to markets.