Investors are struggling to price market uncertainties, with widely fluctuating market prices in both the United States and Canada. West Texas Intermediate, a U.S. crude benchmark, slid 2.9% during the first week of September, following a jump of more than 7% in August and has remained turbulent ever since. Meanwhile, Canadian energy stocks have failed to see any gains despite crude oil prices maintaining a nearly nine-week high. The discrepancy in the Canadian market and rapid fluctuations in the American market point to investors trying to make sense of recent changes and uncertainties, including:
1. Emerging market decline: The ongoing crisis in Venezuela and U.S. sanctions against Iran have led to oil supply declines. In May, the U.S. pulled out of a 2015 international agreement to curb Iran’s nuclear program and reinstated economic sanctions against the country. While the full force of the sanctions won’t take effect until November, importers of Iranian crude oil have already begun reducing their purchases and Iranian crude production fell sharply in August in response. John Kilduff, managing partner at Again Capital, a New York-based alternative investment management firm specializing in commodities, told the Wall Street Journal, “I do believe the lost Iranian barrels will hit the market and consumers hard.” The lost barrels from these two countries could cause a global supply shortage, pushing oil prices higher, which could then lead to lower oil consumption.
2. Increases in OPEC production: In response to concerns that high prices could hurt demand and global growth for oil, OPEC and partner producers agreed to amend their previous production cutting deal (which cut 2% of the global supply in 2017) and increase production by as much as one million barrels a day. This increase is seen as making a big dent in the shortage caused by U.S. sanctions of Iran, and OPEC producers are hopeful that by moving quickly, they will fill global supply outages and keep the market in balance. While this seems promising, uncertainty about whether OPEC will keep this production up is unlikely to be resolved until the members are able to come to terms on their production and the state of the oil market.
3. U.S. trade tensions: Trade discussions between the U.S. and China have also left the market cautious. In regards to talks between U.S. and China, President Trump posted on Twitter, “we are under no pressure to make a deal with China, they are under pressure to make a deal with us.”
4. The growth of U.S. fracking oil production: The U.S. is on the verge of becoming the leading oil producer in the world, surpassing both Russia and Saudi Arabia, due to the rapid expansion of fracking. Yet, fracking is not currently profitable for many producers due to high production costs and the lack of pipelines and associated infrastructure that would allow fracking producers to export oil from Texas and the Gulf of Mexico (where the largest number of producers are based) to global markets. If the costs remain high and oil prices do not increase, a reduction in supply could follow.
These sources of uncertainty are unlikely to abate quickly – likely causing risks to all parties: investors, producers and refiners as they plan the remainder of 2018.
The author would like to thank Abigail Court, articling student, for her assistance in preparing this legal update.
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