With increased consumption, reduced production, inventory drawdowns and OPEC adherence to output curbs, the outlook for global oil prices is positive, says GMP FirstEnergy analyst Martin King.

King expects West Texas Intermediate (WTI) crude to average US$58/bbl this year, up from $50.86 last year.

And while Canadian oil markets have been hit by another price-spread blowout, this widening of the differential between WTI and Canadian prices “will probably be fairly short lived,” King told his company’s market outlook breakfast on Tuesday.

Meanwhile, the veteran analyst expects rail will fill the gap between rising Canadian output and inadequate pipeline capacity while new pipelines are finally built.

Globally, oil demand accelerated strongly through the second half of 2017 and world economic activity is “on a good footing,” King said. For that reason he suspects the International Energy Agency’s (IEA) oil demand growth forecast is too low.

Meanwhile, non-OPEC supplies outside North America are “truly struggling to grow,” he said, adding: “Generally inventories are good and are on track to tighten further in the first half of 2018.”



Vehicle sales strong

King said personal passenger vehicle sales approached 100 million in 2017 and sales of commercial vehicles were around 97 million. He said China, the world’s biggest car market, now accounts for about 20 per cent of all auto sales.

Allowing for scrappage rates, retirements, accidents and so forth, he estimated there was a net increase of 65 million in the global fleet of internal combustion vehicles last year.

That compares to less than one million electric vehicles and hybrids sold. King said the total number of vehicles with internal combustion engines on the road today is probably approaching 1.4 billion.

Electric and hybrid vehicles are still a tiny niche market, he said. “They still sell only because of tax breaks... . They're still money losers for all the automakers ... especially Tesla.”

OPEC may reassess in H2

On the supply side, King said there is “a very good possibility” OPEC will phase out production curbs in the second half of the year. “So we're going to have to see how that shakes out.... [However,] there's not a lot of spare capacity in most of these countries.”

Meanwhile, the big cut in global capital spending that followed the oil price collapse is “still working its way through the system.”

That reduction in industry spending has already has an impact on discoveries. King said 2017 had one of the lowest discovery rates for major fields in the last 50 years.

U.S. supply fears

Some market watchers fear that between relentless production growth in shale plays and President Donald Trump opening up areas previously off limits to drilling, the world will be drowning in U.S. oil.

“Sure there's growth coming and we've increased our supply outlook. ... Higher prices generally means more supply,” King said, noting the U.S. rig count has recovered. “So there's no reason not to expect U.S. supplies to grow.”

However, most of the growth has been from “a one-trick pony” — the Permian Basin.

With oil prices and industry activity rising, so is demand for equipment and crews —  and hence U.S. costs “are definitely rising,” King said. “The number of drilled and uncompleted wells continues to rise. Finding completion crews is a problem.”

He added: “We're not saying [U.S. oil] supply growth is going to stop. We're not saying it couldn't necessarily accelerate. It just takes higher prices, more rigs.”

Meanwhile, he said U.S. rig productivity, while still good, has slipped to about 485 bbls/d per rig from about 650 bbls/d per rig in April.

“We're not saying supply is going to slow down. It doesn't even necessarily have to decelerate. But .... prices are going up, costs are going up. The way to offset that is higher prices. The market is calling for more supplies,” King said.

To keep up with rising global demand, U.S. producers need higher prices, he said, noting the U.S. oilpatch alone can’t meet world demand growth. “It's probably price bullish: the market is saying to the U.S. we want more barrels now.”

Rail to the rescue

Canadian producers haven’t been able to capture all the upside of rising oil prices because of pipeline constraints. Capacity was already tight when an outage on the Keystone pipeline blew out the differential between U.S. and Canadian prices.

Keystone was down completely for about 12 days in November, then operated at reduced pressure.

“That pushed the market to where it was going anyway. We were looking at an oversupply situation —  total supply versus the ability to get those barrels to market on pipelines,” King said. “So railing was going to have to fill a role here at some point. .... the Keystone outage pushed things to the extremes very quickly.”

He emphasized the Keystone outage is not solely responsible for widening the spreads. “We were clearly starting to run up against a wall here in terms of getting barrels to market on the pipelines. We've been talking about more railing for probably two years now ... and it's finally starting to happen. We've basically run out of room on the export pipelines.”

However, the spreads have started to narrow as Keystone ramped up and rail offers a relief valve.

“The way of getting those growing supplies to market now would be you're going to have to put them on the rails. So that takes a little more time. Keystone kind of forced a fast scramble.”

King said there is still plenty of capacity to move crude by rail, including 650,000 bbls/d from Alberta alone.

“There's lots of capacity to take the additional supply growth .... and also to clear the backlog and start narrowing those price [spreads]. So as long as you can take that pressure off ... with railing, you should see these spreads starting to come in. And I think that's what we're going to see over the course of the coming quarter.”

Despite epic delays, King predicts construction of the proposed Trans Mountain pipeline expansion to the West Coast and the Keystone XL connection to the U.S. Gulf Coast.

Hence he is optimistic about market access in the short and long term.

“You get more supplies to market via rail in the short term over the next couple of years. And certainly in the long term, you'll get more barrels to market via pipeline.”