(I originally published this on Feb. 7th, 2020)
We know Alberta has endured a tough time of it; excess domestic oil production due to lack of pipeline capacity (we’re seeing progress finally but oh so slow). Now energy prices are falling again. It’s difficult to determine how low the oil price can go with coronavirus causing a literal seizure of international travel – of not just people, but the goods and services those people produce and consume.
Consider this quote:
Demand fears stemming from the coronavirus outbreak are the primary impetus behind lower prices, with many Chinese refineries reportedly lowering planned February runs in an attempt to support prices. OPEC is also reportedly mulling another 500 Mb/d cut to production in an effort to support markets. The infection rate continues to rise, leading to more quarantines and transportation restrictions throughout Asia and Russia. [Source: https://stratasadvisors.com/Weekly-Price-Outlook/WAOP/02032020-Oil-Price-Outlook%5D
The U.S. is now the largest producer of oil in the world. China is the 2nd largest consumer of crude. Even if OPEC members decide to lower production hoping to bolster prices, it takes awhile to turn off those taps and it takes gumption to voluntarily sacrifice badly needed revenues. With economic activity slowing down (it just has to) those revenues are even more crucial the Russia, the Saudi’s and the much more troubled other members of the ‘OILigopoly’ (I made an economist joke LOL).
According to the International Energy Agency (IEA):
Global oil demand in the third quarter of 2019 grew by 1.1 million barrels a day, more than double the 435,000 barrels a day in the previous quarter, according to the latest report from the International Energy Agency (IEA).China was the largest contributor, with demand increasing by 640,000 barrels a day year-on-year, and the energy agency’s closely-watched report projected a year-on-year acceleration in global growth of 1.9 million barrels per day for the final quarter of 2019.Supply grew by 1.5 million barrels per day in October as Saudi Arabian production normalized, while Norway, Canada and the U.S. saw marked increases. OPEC crude production came in at 29.9 million barrels a day, down 2.5 million from the same period last year.
So the oil consuming nation contributing the most to demand growth is about to put an immeasurable damper on global oil consumption. It’s not hard to understand why oil prices are falling ahead of the inevitable.
Not long ago I bought back a few Western Canadian oil stocks thinking they’d already suffered enough. NOT! Clearly I jumped the gun. The harder question now is should I concede defeat (sell) or average down? I’m not smart enough to entertain the third option – move to Alberta where housing is so much cheaper than in Toronto.