Share By Kishori Krishnan Exclusive To Crude Investing News

The White Paper is out. For several years, the forecasted growth in Canadian crude oil supply, primarily due to the development of the Alberta oil sands, led industry to conclude there was an urgent need for additional pipeline capacity to connect to new and expanded markets. Growth in crude oil supply is still being forecast; only at a slower rate than previously anticipated.

Crude oil production is Canada is expected to double within the next three decades, despite current tight finances and a slower pace of development in the oil sands, an industry association has said.

In a best case scenario, oil production is forecast to rise to 3.3 million barrels per day by 2015 from 2.7 million barrels last year, and up to 4.2 million barrels by 2025, the Canadian Association of Petroleum Producers said.

Solely in the oil sands, production is expected to increase by 83 per cent to 2.2 million barrels per day by 2015, and climb to 3.3 million barrels per day by 2025.

“Even with delays due to current economic conditions, oil sands production is expected to grow, although the pace of development has slowed,” Greg Stringham, CAPP vice president said in the 2009-2025 forecast.

A more conservative outlook for total oil production calls for half the production growth, an increase of 300,000 barrels per day, to 2015 and a gradually declining output down to 2.8 million barrels per day by 2025.

The white paper has noted that while access to markets remains an important consideration for producers, the need for additional pipeline capacity has been tempered by a lower outlook for supply growth and significant new pipeline capacity now underway.

What is also of concern is that on an average, current oil prices are significantly lower than in recent years. The economic downturn in major market areas has also impacted the industry and the global financial crisis has hindered the ability of companies to acquire investment capital.

In line with a lower forecasted growth in crude oil supply, a lower growth in market demand is also anticipated given the economic downturn and the fact that refinery conversions and expansions are proceeding at a slower pace.

Earlier this year, CAPP had conducted a survey of producers to determine planned production of oil through 2025. CAPP used this data along with other inputs to prepare its annual forecast, which this year provides both a growth case and an operating and in construction case.

Rebound seen

Crude oil prices have rebounded sharply in recent months, though not been supported by declining oil inventories. Since market fundamentals are not supporting higher prices and OPEC has kept its production ceiling unchanged at its recent meeting, oil producers have been advised by traders to consider hedging at least some of their future production.

In terms of market fundamentals, U.S. commercial oil (including products) inventories increased by 15.1 million barrels in the week to May 28, to a new high of 1,824.3 million barrels.

In March, the most recent reporting month, OECD industry oil inventories rose by 15 million barrels to 2,745 million barrels. Rising inventories and weakening OECD demand caused forward demand cover to increase to 62.4 days at the end of March, 0.8 days higher than the previous month and eight days higher than a year ago. During the period of high and rising crude oil prices from 2004 to mid-2008, days forward cover tended to be 52 days or less.

In addition, there is plenty of spare upstream and downstream capacity right now. Based on data from the International Energy Agency (IEA), spare OPEC-11 production capacity was 6.3 million bpd at the end of April, and the Saudi’s Khurais field is coming online at the end of June with a production capacity of 1.2 million bpd.

According to Deutsche Bank, global refining capacity will increase by about 2 million bpd in 2009, while world oil demand is widely expected to decline 1.5 million to 2.5 million bpd. During the last bull market for crude oil prices, OPEC spare capacity tended to be 2 million bpd or less and there was very little spare refining capacity.

Also, world oil demand may continue to decline as some traders insist the global recession could last longer or as the economic recovery is relatively weak. In a paper focusing on the impact of financial crises on economies, “The Aftermath of Financial Crises,” Professors Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University found the wealth destruction and economic slowdowns associated with financial crises tended to be severe.

For example, per capita economic output declines an average of 9 per cent over about two years. The IMF is forecasting a 1.3 per cent contraction of the global economy in 2009, but positive growth in 2010.

If oil demand continues to contract in the future, OPEC may be reluctant to cut its production ceiling again. In the communiqué following their recent meeting, OPEC members “reiterated their firm commitment to the individually agreed production allocations.”

Based on IEA data, OPEC-11 compliance slipped five percentage points between March and April, to 78 per cent, because of increased cheating by the usual suspects, Angola, Ecuador and Iran. The Saudis have warned that an additional cut to the OPEC-11 output ceiling would be dependent upon high compliance to previous ones, analysts pointed out.

Futures soar

On June 5, crude futures surged to a 6-month high after a better-than-expected U.S. jobs report, but then retreated. Oil prices  breached $70 a barrel, as investors took the government’s latest employment report as an indication of the improving health of the U.S. economy.

Prices surged to $70.32 a barrel immediately following the report, but turned lower as the day progressed. Crude ended the session down 37 cents at $68.44 a barrel.

The oil market pays particular attention to the health of U.S. economy, the world’s largest consumer of energy. The stronger U.S. dollar, also contributed to oil’s retreat. A stronger greenback weighs down the price of oil because the dollar is used as the currency for oil all over the globe, and so when the dollar strengthens, oil becomes more expensive in other currencies.

Also supporting oil prices, Goldman Sachs released a research report Thursday raising its 3-month price target for crude oil to $75 a barrel from $52 a barrel. By the end of 2009, the report predicts oil will reach $85 a barrel, up from $65 a barrel. And by the end of 2010, Goldman forecasts that crude will hit $95 a barrel.

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