The Non-Shale, Non-OPEC Problem for Oil Traders

Canada and Brazil are producing more crude, hurting efforts to balance the market

Canada and Brazil, the world’s seventh and 10th biggest oil suppliers, are projected to record the fastest production growth outside the U.S. this year. An oil pump jack pumps oil in a field near Calgary, Alberta, Canada.

Canada and Brazil, the world’s seventh and 10th biggest oil suppliers, are projected to record the fastest production growth outside the U.S. this year. An oil pump jack pumps oil in a field near Calgary, Alberta, Canada. PHOTO: TODD KOROL/REUTERS

A wave of new petroleum production from countries like Canada and Brazil is adding a new problem for oil traders who until now had been primarily preoccupied with U.S. output and an OPEC-led coalition cutting supply.

Rising output from Canada and Brazil, along with smaller gains in the U.K. and Norway, represents an under-the-radar concern for some oil traders ahead of next week’s meeting between members of the Organization of the Petroleum Exporting Countries.

OPEC, the 13-nation cartel that controls about 40% of global crude-oil output, and 11 other petroleum-producing countries are poised to renew supply cuts that they hope will bring oil supply back into balance with demand this year. Oil prices remain down over 50% from their highs in 2014, depressed by an oversupply fueled by American shale production.

Attention had been focused on how shale producers are reacting to the OPEC-led cuts, but Canadian and Brazilian production gains are a factor “that people seem to overlook,” said Doug King, chief investment officer at RCMA Asset Management and manager of that firm’s $215 million Merchant Commodity hedge fund.

“It does add to the oversupply nonetheless,” Mr. King said.

Not counting the U.S. and the 24 countries in the OPEC-led coalition, the next five biggest producing countries are poised to increase their combined output by around 300,000 barrels a day, according to a Wall Street Journal survey of five oil research agencies and investment banks.

Canada and Brazil, the world’s seventh and 10th biggest suppliers, are projected to record the fastest production growth outside the U.S. this year as long-planned projects come online. Norway and the U.K. are also seen as raising production this year, though by smaller amounts. Of the five countries, only China’s output is expected to fall this year.

To be sure, oil output growth in Canada, Brazil and other countries could slow down in the years ahead. Only a fifth of Canada’s vast oil sands deposits are estimated to be profitable due to their high producing costs.

Even in the short term, the combined gains from these places are a small addition to a market of 96 million barrels a day.

But for now, every extra barrel is a problem for producers that want oil prices to rise.

“This is all part of the larger issue—there is still a lot of oil out there,” said Olivier Jakob, managing director of industry consultant Petromatrix.

OPEC, the 13-nation cartel controls about 40% of global crude-oil output. The OPEC logo is seen at the Palace Congress building during 15th International Energy Forum and informal meeting of the Organization of the Petroleum Exporting Countries ministers in Algiers, Algeria, in September 2016.

OPEC, the 13-nation cartel controls about 40% of global crude-oil output. The OPEC logo is seen at the Palace Congress building during 15th International Energy Forum and informal meeting of the Organization of the Petroleum Exporting Countries ministers in Algiers, Algeria, in September 2016. PHOTO: MOHAMED MESSARA/EUROPEAN PRESSPHOTO AGENCY

OPEC wants to drain record levels of oil out of storage, but the process has gone slower than expected. Prices have zigzagged around $50 a barrel in recent weeks, about $10 a barrel below where the Saudis and other OPEC members have signaled they want. Analysts widely expect the deal to be extended when the producers meet on May 25.

Most of the gains in Brazil and Canada come from projects sanctioned years ago, when oil prices were over $100 a barrel.

In Canada, output is expected to hit an all-time high this year at around 4.7 million barrels a day—growth of around 200,000 barrels a day, according to the survey.

Just like American shale drillers across the border, Canadian producers have also benefited from improved technologies and increased efficiency as they cut costs. Earlier this month, the number of rigs drilling for oil rose to an annual average of 86, the highest since December 2015, according to data from oil-services provider Baker Hughes.

Cenovus, one of Canada’s biggest oil sands producers, says it has cut per-barrel operating costs by 30% between 2014 and 2016. The company expects its production to double this year, helped by expanding capacity and new acquisitions.

“We can’t control commodity prices, so what we’ve been doing over the past several years is to significantly reduce our costs to remain competitive,” said Sonja Franklin, spokeswoman for Cenovus.

Crude-oil productionTHE WALL STREET JOURNALSource: International Energy Agency
.million barrels a dayCanadaBrazil2008’10’12’14’16012345

In Brazil, according to forecasters surveyed by the Journal, oil output is expected to grow by an average of 212,000 barrels a day in 2017, potentially reaching 2.8 million barrels a day.

Brazil is one of the most important oil frontiers, with as much as 50 billion barrels of recoverable resources. The South American country has attracted billions of dollars in investment from the world’s largest oil companies, including Royal Dutch Shell PLC and Total SA.

Some analysts say the country has the opportunity to emerge as the world’s fifth-largest crude producer by 2025, behind only Saudi Arabia, Russia, the U.S. and Iraq.

Growth in countries like Brazil and Canada, however, ultimately depends on the how successful the OPEC deal is. If prices rise too sharply, those countries would boost production, again fueling the glut.

“Canada and Brazil need oil to be at $60 and more for a longer time period to be growth drivers,” said Jon Morrison, research director at Calgary-based CIBC Capital Markets. “But if the OPEC deal achieves that price, then we will see a lot of extra barrels.”

Write to Georgi Kantchev at georgi.kantchev@wsj.com

https://www.wsj.com/articles/the-non-shale-non-opec-problem-for-oil-traders-1495099802?mod=e2tweu

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