OPEC hates hockey. And loonies. And anything that’s red and white and has a maple leaf on it, for that matter.
It also hates poutine (it isn’t very fond of Putin, either). Oh, and let’s not forget the most egregious cause for the oil cartel’s ire: the oil sands.
There’s really no better way to say it: OPEC hates Canada.
We’re nearly 30 weeks into oil’s price slump, and producers still don’t think the Saudis are going to blink anytime soon. Companies are furiously hedging production against lower crude prices, and most don’t see relief in sight.
After all, a barrel of Brent crude this morning traded at multi-decade lows below $46 per barrel.
It’s bringing drillers across the globe to their knees.
All the Saudis need to do now is wait for U.S. producers to become fully exposed to sub-$50/barrel oil prices, something we’re going to start seeing in the latter half of 2015.
Yet there is one country that refuses to capitulate…
“Why,” Saudi oil ministers ask themselves on sleepless nights, “why can’t Canada just fall in line with the rest of the world?”
Why, indeed?
Casualties of War
There were 61 casualties in the United States this week, all victims of Saudi Arabia’s relentless oil price war. That’s the number by which the U.S. rig count fell in last Friday’s count by Baker Hughes.
That leaves 1,750 units in our oil and natural gas fields.
Most of the damage was done in Texas, where the number of rigs dropped by 30 — 28 of which were in the Permian Basin.
Don’t get me wrong, dear reader; there are still a tremendous number of bits biting into West Texas soil — 502, to be exact. That alone represents about 15% of the rigs worldwide.
Still, you’d think that oil at $46 per barrel would bring cost-intensive production to a grinding halt, wouldn’t you? After all, the Saudis are betting that a low price environment will bring tight oil production in the U.S. to a standstill.
Why shouldn’t their strategy work in areas like the oil sands?
Unfortunately, the Saudis weren’t expecting this outcome…
Oh Canada!
Despite oil prices tumbling over 50% since last summer, Alberta producers collectively flipped off Saudi Arabia recently after production rose to 2.9 million barrels per day — a 13% year-over-year gain.
In case you’re keeping track, that amounts to almost 90% of Canada’s daily oil output.
Moreover, production is expected to grow in 2015 in spite of the fact that we’re talking about an oil supply that is incredibly cheap to buy and incredibly expensive to produce.
Adding more insult to OPEC’s injury is news that the number of Canadian drilling rigs surged by 158 units. Although slightly fewer are operating compared to last year, it’s clear that Alberta companies are in this for the long run.
But there’s an even more insidious reason why the Saudis hate Canada, and it all boils down to the whole reason for this price war: market share.
That’s precisely what Canada is slowly taking away from OPEC.
Look, it’s a well-known fact that United States crude oil imports have been plummeting since 2006, coinciding with the tight oil boom. During September of 2006, the U.S. imported 14.491 million barrels of crude oil and petroleum products per day.
We’ve slashed that amount by nearly 40%, importing 8.905 million barrels per day last October — the lowest it’s been since 1996.
But despite the U.S. losing its taste for OPEC oil (OPEC’s exports to the U.S. have declined 55% since September of 2006), Canadian imports have steadily increased year over year in 24 out of the last 25 years!
Click Chart to Enlarge
Now let’s take things a step further.
Today, ground zero for the ongoing price war is in the Gulf Coast, and the reason is simple enough to understand.
According to the EIA, over half of the United States’ refining capacity is located in PADD 3 (the Gulf Coast), where 51 refineries operate with a capacity of 9.7 million barrels per day. Adding to the importance of this area is the fact that 81% of these refineries are capable of processing heavy crude.
Click Map to Enlarge
So it shouldn’t come as a surprise that Canadian exports to PADD 3 have increased 620% over the last decade to approximately 288,000 barrels per day. Even though this only accounts for about 9% of Canada’s total crude exports to the United States, the area will play a critical role for the oil sands going forward.
Think about it…
Oil sands production represents 56% of Canadian production. The latest projections from CERI estimate that this amount will increase to 3.7 million barrels per day within five years, then plateau at 5.2 million barrels per day by 2030.
At that point, will we even need OPEC?
Make no mistake: We will see oil prices bottom in 2015.
However, it’s up to you whether or not you take advantage of the upcoming buying opportunity, eh?
Until next time,
Keith Kohl
Check us out on YouTube!A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.
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