Falling oil prices: Is this the end?
If you read my last post about Canadian investors losing faith you probably know that I’ve been waiting to see an end to the falling oil prices. I live in the province of Alberta in Canada and it’s basically a petroleum province. A large percentage of Albertans are employed directly through the oil and gas companies or their service companies like construction, or drilling. Pretty much the rest of them are employed indirectly by working at the banks and car dealerships to help flood the province with jacked up rig rockets…Oh and feeding us, they feed us too…
What’s a Rig Rocket you might be wondering?
Well since you’re clearly not from Alberta with that question, here’s an example.
But Rig Rockets have nothing to do with falling oil prices, if anything they’re helping get rid of the oversupply!
On to the real topic of falling oil prices!
Since oil prices started to fall a little over 18 months ago jobs in Alberta have been dropping faster than Donald Trump supporters should be (how does his rating not drop with every public appearance?). By the end of August 2015 Alberta had lost 63,500 jobs and i hasn’t stopped there with Husky and Cenovus letting go a few hundred more this past week.
Needless to say when news of a recent meeting between Saudi Arabia and Russia over oil productions flooded social media earlier this week a lot of people were getting excited. They can’t possibly be meeting to let each other know that they’re increasing production, right? Well no, they were talking about maintaining current production levels. Which could be great but I don’t think it will be all sunshine and rainbows any time soon. These talks came with several strings attached and here’s my thoughts on them:
1. They both agreed to not increase from levels achieved on January 11th, 2016.
That’d be great if January 11th was a slow day or maintenance day for some of the wells or anything but it was one of their highest production days. Now both countries are expected to maintain productions of over 10 million barrels a day which was Russia’s highest ever and just under Saudi’s peak. (Together they produce almost 20% of the world’s demand) That’s like the Canadian Olympic Hockey teams promising to not score goals faster than they have in the last Olympics; it’s still going to be more than you.
2. The deal hinges on several other key countries making the deal as well.
By getting several other major players to agree to halt production increases as well Saudi and Russia can maintain their massive share in the market place. The deal is supposed to include Qatar, Venezuela, Iraq and Iran. However there’s one big problem here. Iran wasn’t really consulted on the deal and they don’t want to play that way. Iran recently signed a deal with the USA and the European Union about nuclear sanctions. This deal opened up their productions to new marketplaces that they plan on selling to.
Basically by making this deal hinge on Iran’s cooperation Saudi Arabia and Russia are doing that stupid game that you do when you and your friends all don’t want to admit they don’t want to go somewhere and stand around saying “Well I’ll go if you go with me” “Ok! I’ll follow, you go first” “Noo, you need to go first. That was the deal!” And not even 48 hours later Iran’s oil minister has confirmed the childish game. They think the freeze is a great idea but they’re not going to curb production and many others think it’s just not going to work. The problem with capping supply to help stop falling oil prices is that there will always be another country that would like to increase their market share and plan to pump more oil.
3. Saudi Arabia and Russia aren’t solely responsible for the over supply of oil.
It’s estimated that oil is being over produced by a rate of 1.5 million barrels a day right now and that’s expected to increase to 1.75 million. Everyone else is increasing their productions and it’s not like many of these countries and companies can just throttle back.
I know here in Alberta there are billions of dollars invested in new projects that aren’t going to be put on hold until oil prices rebound. If they were to put one of these projects that are currently under construction on hold there would be hundreds of millions to “safe” it out and make sure there are no environmental risks and that nothing will degrade being left as is for a few months or years. Then when they start it back up there will be increased general costs due to inflation and right now labour and materials are much cheaper because everyone is squeezing down to cut costs. There will also be additional testing and engineering costs.
So is this “deal” the long awaited end in falling oil prices and relief for many Albertans? It pains me to say it but I really don’t think so. In my opinion I think it’s all just a public stunt that I’m not sure what the purpose was exactly. Maybe to test the volatility in the market with speculation or maybe all of the parties mentioned have been in talks and one reneged on the deal when it went public. Who knows! Oil is just another commodity that seems to be untameable!