Canada could have been ‘first responder’ to fill Saudi oil gap if not hamstrung by own risks

CALGARY — High-precision attacks on critical Saudi Arabian oil infrastructure would compel major consumers of the commodity to diversify their energy sources to places like Canada, but the oilsands are suffering from their own geopolitical risks, according to analysts.

Global oil prices surged 14 per cent, or US$7.71 per barrel, to US$62.56 as markets reacted to rocket strikes on Saudi Arabia’s 5.7-million-barrels-per-day Abqaiq oil facility, which RBC Capital Markets managing director of global energy strategy, Michael Tran, called “the central bank of oil.”

Given reports of the damage so far, analysts believe Abqaiq – which represents 60 per cent of Saudi capacity – is likely to be offline for months. In response to the supply shock, Saudi Arabia is expected to draw oil from storage and the U.S. is preparing to dip into its Strategic Petroleum Reserve.

As a result, analysts and economists believe the hit to global oil supply will amount to roughly three million barrels per day — enough to lift oil prices by as much as US$10 and also re-introduce a geopolitical risk premium to the oil market.

“Canada could, in theory, have been the first responder,” Tran said of the country’s ability to supply the global market.

Instead, Canadian companies are likely to enjoy the spike in oil prices through higher returns on their existing production levels but won’t be able to pump more oil to capture more of the upside because export pipelines are full.

“The Canadian energy industry remains hamstrung with other types of geopolitical risk,” Tran said, referring to the oil curtailment order in Alberta, delays on major export pipelines to the West Coast and U.S. Gulf Coast and restrictive regulations on new energy infrastructure.

Whitecap Resources Inc. president and CEO Grant Fagerheim said the attack on Saudi Arabia won’t change the company’s behaviour in the immediate term but it could help attract some investors that had left the country. Canada sits on the world’s third-largest oil reserves after Venezuela and Saudi Arabia.

“This could be an opportunity to alter the narrative a little bit about the stability of Canadian energy,” Fagerheim said, noting that Canada was once viewed by energy investors as a stable place to invest but investment dollars have migrated south to the Permian basin in Texas, which has been a major source of supply growth.

Whitecap is in the middle of setting its budget for 2020 and the attack on Abqaiq is likely to affect oil price assumptions for next year. Fagerheim said Whitecap is trying to “manage to the downside but expose ourselves to the upside.”

Some analysts believe the oil price response to the attack on Saudi Arabia actually understates the magnitude of the event.

To date, I’m surprised the price response is as muted as it is

RS Energy Group chief economist Judith Dwarkin

“To date, I’m surprised the price response is as muted as it is,” RS Energy Group chief economist Judith Dwarkin said, noting that U.S. President Donald Trump issued a statement indicating the country would use its Strategic Petroleum Reserves.

Dwarkin said that in recent months there have been smaller-scale production disruptions following violence in Libya and elsewhere but oil markets have “hardly quivered,” but the attack on Saudi Arabia is a much higher-magnitude event.

“This seems to suggest the Saudi’s can’t protect themselves against this kind of attack,” she said, which also demonstrates “heightened possibility there could be more in the near future.”

As U.S. and Saudi officials accuse Iran of perpetrating the attack, most economists and political analysts believe there could be additional attacks or escalation in the coming months.

“I don’t think we’re anywhere near done with this event,” said Scotiabank commodities economist Rory Johnston, adding the market is now grappling with the question: “Where do we go on the energy security side?”

Johnston said that most of the perceived risk in the oil market in recent years has been focused on the demand for oil – will oil prices fall as consumers use less gasoline and diesel? The attack on Saudi Arabia re-introduces the previously overlooked risks on the supply side – what happens to oil prices if there’s a major disruption?

You can’t ignore attacks on the largest petroleum facility on the planet … What happens next still remains an open question.

Rory Johnston, Scotiabank commodities economist

“You can’t ignore attacks on the largest petroleum facility on the planet, let alone the fact that this is the latest in a series of attacks on Saudi oil infrastructure,” Johnston said. “What happens next still remains an open question.”

Indeed, analysts at multiple investment banks upped their price targets on Canadian oil producers Monday morning and all cited the return of “geopolitical risk” as a reason why domestic producers could be more highly valued in the future. Share prices at multiple Canadian oil producers were up over 10 per cent on Monday, including Canadian Natural Resources Ltd., Cenovus Energy Inc. and Encana Corp.

“This is probably not the end of the situation in the Middle East, it’s probably only the beginning, and this risk premium, if we end up with a risk premium being built into the world price, that’s going to incent people to invest more to diversify production,” said Richard Masson, an executive fellow at the University of Calgary School of Public Policy.

Masson said the attack could lead to more investors putting their capital to work in alternative sources of oil supply.

“The rest of the world has had to sit back and watch as all investment went to the U.S. and into the Permian and now we have a situation where the deep offshore drilling hasn’t happened and there’s been a lack of investment including in the oilsands,” Masson said.

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