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OPEC is enduring one of the most head-spinning years in its history, swerving from cutting oil production to boosting it as quickly as possible. Now it’s talking about reversing course again.

Ministers from the group gathering in Abu Dhabi this weekend will discuss the possibility of cutting production again next year, according to delegates, a move that would mark an abrupt end to six months of supply increases.

The message from OPEC looks like: fasten the seat belts

The group is responding to a worrying prospect: Even though U.S. sanctions on Iran are removing significant amounts of crude from world markets, a fresh surge of American shale oil threatens to unleash a new surplus in 2019. Some members are concerned that inventories are rising, said the delegates, who asked not to be named as the discussions are private.

Crude prices already reflect this. Brent for January delivery has retreated about 15 per cent from a four-year high reached in early October. The Organization of Petroleum Exporting Countries and its allies are showing they’re worried, signalling last month that they might need to dial back near-record output levels.

“The message from OPEC looks like: fasten the seat belts,” said Bob McNally, president of Rapidan Energy Advisors LLC, a consultant in Washington. The cartel looks sets to “put pedal to the metal to boost production, and then immediately slam the brakes pretty hard and talk about cutting supply.”

If the group, led by Saudi Arabia, does ultimately decide fresh cutbacks are necessary, it will confront a number of challenges. It will need to once again secure the support of rival-turned-partner Russia, which has less need for high oil prices. There’s also the risk of antagonizing the kingdom’s key geopolitical ally, U.S. President Donald Trump.

Powerful Forces

All this is a far cry from the usual OPEC mantra of preserving stability and careful market stewardship. Yet it does reflect the level of uncertainty in a market experiencing huge shifts in supply and demand.

Earlier in the summer, prices began to surge as the risk of production shortfalls from sanctions on Iran and Venezuela’s economic collapse rattled the market. Losses from those two OPEC members threatened the biggest supply disruption since the start of the decade and Brent crude eventually peaked above US$86 a barrel last month.

Yet big things are happening on the other side of the supply equation too, meaning the risk of scarcity may not last. OPEC has been in “produce as much as you can mode” to reassure consumers, Saudi Energy Minister Khalid Al-Falih said in Riyadh last month. The kingdom has lifted output close to record levels, while Libya is pumping the most in five years.

Then there’s the small matter of U.S. production growing at the fastest rate in a century, just as fuel demand is at risk from the slowdown in emerging economies and the U.S.-China trade war.

Well Supplied

Right now, global markets are “well supplied,” in the assessment of the International Energy Agency, which advises consuming nations. OPEC’s own projections show that next year the world will need about 1 million barrels a day less than the 31.8 million its 15 members pumped in September.

“They will absolutely want to at some point next year try to arrange a reduction in production,” said Ed Morse, head of commodities at Citigroup Inc. “Everything points to a fairly weak balance: the world economy is decelerating, the China trade tensions are having a visible impact on demand.”

The meeting this weekend of the Joint Ministerial Monitoring Committee, a six-nation body representing the broader 25-country coalition, is intended as just an interim review before all ministers discuss policy next month in Vienna. Still, it will discuss options for 2019 including the scenario of fresh supply cuts, the delegates said.

“When OPEC looks at the challenge with the shale story in 2019, what does it need to do — does it have to start signalling now?” said Helima Croft, chief commodities strategist at RBC Capital Markets LLC. “At this JMMC, do we get any clues that OPEC needs to get back into active market management?”

Big Decision

There’s a lot to consider before the December meeting. U.S. sanctions could end up squeezing Iranian output so much that other producers won’t need to cut. Although Washington granted some of Iran’s customers temporary waivers that let them keep buying, the Trump administration has said repeatedly it intends to entirely choke off the country’s energy revenues.

Shale has plenty of potential to surprise. The U.S. is already poised to satisfy most of the increase in global oil demand next year, the IEA forecasts. In August, a surprise surge in output meant the country briefly overtook Russia as the world’s biggest crude producer, with output of 11.3 million barrels a day. The Energy Information Administration just increased its 2019 production forecast by 300,000 barrels a day to 12.06 million.

Then there are political considerations. The Saudis may struggle to persuade the rest of OPEC to return to cutting production. Some members, like Iraq, are pressing on with new projects. Others may have grown weary of having their production policy steered by the kingdom.

Russia, the most important non-OPEC partner in the coalition, has ramped up output to a post-Soviet record and President Vladimir Putin has said he’s comfortable with prices in a US$65 to $75 range, giving some downside from the current level of about US$73 in London.

Saudi Minister Al-Falih discussed the agenda of the Abu Dhabi meeting with his Russian counterpart Alexander Novak by phone on Monday, an official familiar with the matter said, asking not to be identified as the information isn’t public yet. While there has been talk in the market that the group should consider renewed output cuts, Russia currently isn’t ready for such a decision, the official said.

If another cuts agreement can be secured, it could prompt renewed attacks from President Trump or encourage U.S. lawmakers to advance anti-cartel legislation known as NOPEC.

“There’s a lot at stake for them if they antagonize the wrong sets of people in consuming countries,” said Citigroup’s Morse.
With assistance from Elena Mazneva

Bloomberg.com

Finances in Ontario, already one of world’s most indebted regions, will get a whole lot worse if the government follows through on its campaign pledges.

The budget deficit in Canada’s most populous province is poised to jump almost 50 per cent to $18.7 billion (US$14.3 billion) in 2019-20 from this fiscal year under plans by new Premier Doug Ford, according to a report from Toronto-Dominion Bank. By 2022-23, the province’s net debt would rise to $483 billion, or to about 48 per cent of its annual output.

Finance Minister Victor Fedeli is scheduled to release an economic update on Nov. 15. It comes in the wake of an independent inquiry that estimated in September the deficit for the fiscal year ending March 31 2018-19 could be as high as $15 billion, more than double the previous government’s forecast, due largely to accounting changes. TD is estimating a budget deficit of $12.5 billion for this year including a $1 billion reserve.

“The upcoming fiscal update will provide a huge opportunity for the government to signal how it plans to slay the deficit monster,” TD’s economists Derek Burleton and Rishi Sondi wrote in the note released Wednesday. “From a credibility perspective, the sooner the government gets its fiscal house in order, the better.”

Ford, who took office late June, pledged to cut corporate and personal income taxes, which could cost $3.6 billion per year by year three of its mandate, according to TD. A promise to reduce the gas tax would would cost another $1.2 billion per year.

The path to balance will be fraught with hard decisions

Derek Burleton and Rishi Sondi, TD Bank economists

To be sure, Ford has committed to balancing the books over time, and could introduce cuts or other spending restraints. The government has already halted expansions at some universities, scrapped a pilot basic income program, and plans to cap social assistance which together with other measures could shave off $2 billion from spending this year, according to the report. Allowing other programs to lapse could save another $1 billion while freezing a minimum wage hike may support employment and boost revenues.

“If the government plans to honour its campaign promises, program spending will have to be pared significantly,” the economists said. “Should the economy take a turn for the worse, the government’s job becomes exponentially harder. All told, the path to balance will be fraught with hard decisions.”

Bloomberg.com

CALGARY – Imperial Oil Ltd. said it will build a brand new $2.6-billion oilsands project in Alberta, but a newly elected governor in Michigan threatens the company’s ability to move the additional oil production to its refineries.

Imperial announced late Tuesday it would proceed with its 75,000 barrels per day Aspen oilsands project north of Fort McMurray, Alta., which marks just the second time a new oilsands project has been given a green light since the oil price collapse of 2014, after Canadian Natural Resources Ltd. announced it would build a 40,000 bpd project called Kirby North.

The Aspen project also marks the first full deployment of a technology that combines steam with chemicals, called solvents, that oilsands companies have been experimenting with for years in an attempt to lower carbon emissions.

Construction on the new project will begin before the end of the year and Imperial expects to begin pumping oil from Aspen in 2022, at which point new Canadian export pipelines would be in service, president and CEO Rich Kruger said.

However, there could be fresh problems for a Canadian export pipeline following the U.S. midterm elections Tuesday after Gretchen Whitmer, a Democrat who has vowed to shut down a critical Enbridge pipeline called Line 5, won the Michigan governor’s race.

Enbridge’s Line 5 moves 540,000 barrels of oil per day across Michigan’s Straits of Mackinac between Lake Michigan and Lake Huron toward Sarnia, Ont., where Imperial owns a refinery and a petrochemicals complex.

During the election campaign, Whitmer promised that as governor she would “immediately file to enjoin the easement and begin the legal process to decommission Line 5.”

In October, Enbridge announced a deal with former Michigan governor Rick Snyder, a Republican, to replace the portion of Line 5 that crosses the Straits of Mackinac at an estimated cost of between $350 million to $500 million.

Enbridge spokesman Michael Barnes said in an email the company is continuing to work with the state, but did not address whether a new governor could jettison the agreement with Snyder.

Kruger said during Imperial’s investor day presentations Wednesday that he wasn’t familiar with the new governor’s position but downplayed any potential threat as campaign rhetoric. “I understand campaigns are campaigns,” he said.

He also acknowledged that Canadian oil pipelines are constrained, leading to record-setting discounts for domestic crude and that new production will require new pipeline capacity or move on railway cars.

“I wouldn’t say that we have a surplus of plumbing,” Kruger said of Canadian oil export pipelines. “I don’t have other pipe that would get crude there in a material way.”

Analysts were also critical of the decision to proceed with the project amid ongoing pipeline constraints.

“We suspect the street will question the company pursuing such a large project in the midst of lingering uncertainty with respect to longer-term pipeline egress,” Raymond James analyst Chris Cox wrote in a research note.

Imperial stock was down 1.47 per cent to $41.57 on the Toronto Stock Exchange.

Kruger believes it’s the right time to move ahead with the first oilsands project that uses solvents in addition to steam – a technological breakthrough that is expected to reduce emissions and water use by 25 per cent.

The technology could lead to emissions’ reductions between 17 per cent and 27 per cent, according to a study from IHS Markit.

“These technologies are potentially transformational for the industry,” IHS Markit vice-president, North American crude oil markets, Kevin Birn said, adding that Aspen would “provide a model for the rest of the industry.”

A handful of other companies including Suncor Energy Inc., Cenovus Energy Inc. and MEG Energy Corp. have been developing their own versions of solvent-assisted, steam-based oilsands plants but Imperial is the first to bring the technology to a full-scale commercial development.

“It can provide a demonstration to the industry and to the world of the next-generation technology,” Birn said, adding that Aspen is also expected to have lower capital costs than previous projects of a similar size.

Aspen, which could eventually be expanded by another 75,000 bpd to produce a total of 150,000 bpd, is an important growth project for Imperial, which was once among the three largest oil and gas producers in Canada but has been leapfrogged by the likes of Canadian Natural and Cenovus after those companies’ major acquisitions in recent years.

Imperial indicated that Aspen, which will be built near the company’s Kearl oilsands mine, would benefit from shared warehousing, workforce housing, transportation and logistics with Kearl.

In addition, the new project would benefit from a wider slowdown in the Alberta economy.

“When’s the best time to build things? When no one else is building them because we will have the highest quality trades,” Kruger said.

• Email: gmorgan@nationalpost.com | Twitter: geoffreymorgan

Investors in North American cannabis companies were still digesting the results of Tuesday’s U.S. midterm elections — which saw voters in three states legalize cannabis in some fashion — when the sudden resignation of U.S. Attorney General Jeff Sessions sent shares across the sector soaring late Wednesday afternoon. 

“The entire space is now rallying on the Sessions news,” noted Russell Stanley, managing director of equity research at Beacon Securities Ltd. “The industry viewed Sessions as a major obstacle to cannabis legalization and so this risk has now been removed — the industry, especially companies that derive bigger operational benefits from the U.S., are responding to that.”

In January, Sessions issued a memo on marijuana enforcement that rescinded the Obama-era policy of non-interference with marijuana-friendly state laws. That memo unleashed a bipartisan backlash, resulting in the STATES Act — a bill introduced by Democratic senator Elizabeth Warren and Republican senator Cory Gardner that pledged to prevent federal interference with states that have legalized cannabis.

“The Sessions memo actually galvanized the legalization movement and got them to circle the wagons, which completely backfired on Sessions,” Stanley added.

Shares of companies on both sides of the border charted significant gains after it was revealed Sessions was out and was being replaced by his former chief of staff, Matthew Whitaker. 

Among the biggest gainers were Vancouver-based Tilray, whose Nasdaq-listed shares soared almost 30 per cent for the day, while California-based MedMen Enterprises rose as much as seven per cent on the Canadian Securities Exchange. Other major players such as Canopy Growth Corp. and Aurora Cannabis both saw their share prices rise roughly seven per cent in the latter part of the day, while Aphria rose by almost five per cent.

The gains came after a lukewarm response from investors to Tuesday’s midterms, in which voters in Michigan had voted to legalize cannabis for both medicinal and recreational use, while those in Missouri and Utah had approved ballot measures allowing the sale of medicinal pot.

As a result of the votes, recreational cannabis will soon be legal in 10 U.S. states, while medicinal cannabis will soon be legal in 33 states plus the District of Columbia.

While Sessions’ departure was a key win for cannabis investors, a loss by another Sessions could have an even bigger impact, according to GMP Securities analyst Martin Landry.

Texas Republican Pete Sessions lost his seat in the U.S. House of Representatives to the more cannabis-friendly Democratic candidate, Colin Allred, a former NFL player, one of several wins that saw the Democrats regain control of the House.

Pete Sessions had headed the House Rules Committee and had actively blocked the House from voting on marijuana-related amendments. 

“A Democratic committee head will have a significant impact on cannabis reform, and possibly speed up the approval of the STATES Act,” Landry said.

While the Democratic win could also accelerate the chances of federal legalization in the U.S., some prefer the current pace of incremental gains. 

“I hope they won’t legalize federally anytime soon,” said Marc Lustig, CEO of Origin House (formerly CannaRoyalty).  

Origin House is a Canadian-based cannabis products and brands company that operates primarily in California, where it supplies branded cannabis products to licensed dispensaries. Companies like his are currently among the only ways investors can gain exposure to the U.S. cannabis industry.

A Democratic committee head will have a significant impact on cannabis reform, and possibly speed up the approval of the STATES Act

analyst Martin Landry

“There’s no question that when federal legalization happens in the U.S., massive conglomerates like pharmaceuticals, the tobacco and alcohol guys will all start buying up everything possible. The fact that it remains the way it is now, has given us free reign to build our chess board,” Lustig said. ”If the STATES Act bill gets passed, that’s about as perfect as it gets for us.”

It is unclear, however, whether the implementation of the STATES Act will allow American cannabis companies to begin listing on federal stock exchanges — which is the main disadvantage they have now, compared with their Canadian counterparts.

“If you’re listed on the TSX, Nasdaq, NYSE or any one of those big exchanges, you cannot touch the plant in the U.S. I am not sure the STATES Act will change that — it will just mean that the individual states have full right to determine how cannabis can be consumed and moved within its borders,” Landry said.

For licensed producers such as Aurora Cannabis, the wave of optimism toward cannabis in the U.S. is a positive development, although the real victory lies in who will be able to get a first-mover advantage on the medicinal market south of the border.

“We are poised and ready to enter the U.S. market as soon as it is legal to do so,” said Cam Battley, Aurora’s chief corporate officer. “What we will not do is put our NYSE or TSX listings at risk — but the instance it is deemed allowable, whereby we will not be violating U.S. law, we will enter.”

U.S. steel and aluminum tariffs aren’t having “the dire impacts” predicted for the Canadian auto sector, an analyst said, suggesting that losses, if any, are minimal and are being overblown.

Cormark Securities analyst David Tyerman, who covers the two largest manufacturers of autoparts in Canada  — Magna International and Linamar Corp. — said the sector’s largest companies haven’t seen a significant impact to their bottom lines since U.S. President Donald Trump imposed tariffs of 25 per cent and 10 per cent on steel and aluminum respectively on May 31.

The real danger, Tyerman said, was that Trump would make good on his threat to impose auto tariffs of 25 per cent on the sector. The threat led to uncertainty, but the USMCA trade deal that the U.S. and Canada signed in September eliminated that risk.

“It just doesn’t make that much of a difference,” Tyerman said. “It would be good if they weren’t there. It might bring the price (of the commodities) down a little bit, but the reality is it doesn’t gigantically change the equation of the overall economy.”

The main reason, Tyerman said, is because companies such as  Linamar and Magna receive rebates that cover as much as 100 per cent of the tariff charges from the federal government if they import steel and aluminum from the U.S. and export it back out.

In its second-quarter earnings report, released after Trump imposed the tariffs, Magna estimated that the company would lose US$60 million per year because of the tariffs. “It might sound like a lot to you and me,” Tyerman said, “but it’s not to Magna, who makes US$34 billion in sales a year.”

Due to the uncertainty over the tariffs and the lack of a trade deal at the time between Canada, the U.S. and Mexico, Magna lowered its outlook to between US$2.3 billion and US$2.5 billion, down from a range of US$2.4 billion to US$2.6 billion.

Linamar CEO Linda Hasenfratz has been outspoken on the tariffs, going as far as to warn on Tuesday that the tariffs may result in a recession.

“This is taking a toll,” Hasenfratz said at a conference in Montreal. “We may be past the point of no return of being able to stop the ramifications.”

But on Wednesday, Hasenfratz clarified during a third-quarter earnings call that while the impact of the tariffs on the Guelph, Ont. company is “not zero, it’s certainly not close to material for us.” Hasenfratz said there was no impact to Linamar’s U.S. facilities and any impact to its Canadian facilities is reimbursed by the government.

Her concern, she said during the call, was centred around what the tariffs could do to American companies such as Ford Motor Co.

It would be good if they weren’t there. It might bring the price (of the commodities) down a little bit, but the reality is it doesn’t gigantically change the equation of the overall economy

Cormark analyst David Tyerman

Smaller companies in the field such as the Markham, Ont.-based Exco Technologies Ltd. are also reporting minimal effects. The company reported “a modest drag on profitability” due to the tariffs, in a third-quarter earnings report in August. The company’s net income grew nearly three per cent compared with the third quarter of 2017. 

As well, both large-cap and small-cap companies are likely to benefit from the price of aluminum plunging since Trump announced the tariffs. Its U.K.-based LME benchmark puts aluminum at US$1,950 per metric tonne — more than $350 cheaper than it was on June 1.

The price of hot rolled coil steel, the U.S. benchmark, has declined nearly US$100 to US$817 per metric tonne since the tariffs were implemented. The price is still quite high for automakers, however, in comparison to the US$609 per metric tonne at which they could purchase it on Nov. 7, 2017. Hazenfratz said that higher commodities costs in the company’s industrial segment have already lead to price increases for customers.

While these companies haven’t seen significant losses, Veritas Investments analyst Dan Fong said that any additional costs — however small — will eventually fall to consumers — the customers going into dealerships to buy cars, Fong said.

“If you think about the second-order effect on what these tariffs will do to the cost of a car if you have to pass the whole thing on to the consumer … depending on the car, the increase in cost will be (between $500 and $1,000),” he said.