But there is much, much more behind oil's drop over the past few weeks.
OPEC has become less of a factor in pricing, Saudi Arabia needs America's political alliance more than perhaps ever before, and *Canada has been bogged down in pipeline red tape for the past, well, call it fifty years. U.S. oil players are loving life.
*Few Canadians know, many U.S. energy companies make more refining and pricing Canadian oil (about $20-$25 per barrel) than Canadian firms make extracting the oil! Are Canadians upset about this arrangement? Depends which part of the country you are in. But generally, not really. What's more, Canada is losing an estimated $80 million per day due to pipeline delays of Trans Mountain and KeystoneXL.
In short, OPEC's worst nightmare is runaway U.S. production, with the infrastructure to take it to international markets. America's net imports of crude oil have been collapsing for a decade, long before the U.S. brought on its most significant, new oil-producing region.
What you are looking at (chart above) is historic. It will change the trajectory of the global order. This type of energy shift can and will change the world's economy, international trade deals and so much more.
OPEC is most scared of the thousands of shale oil wells coming online in the Permian basin - West Texas.
According to Bloomberg,
"In less than a decade, U.S. companies have drilled 114,000. Many of them would turn a profit even with crude prices as low as $30 a barrel."
A barrage of Texas pipelines set for completion in 2019 and 2020 will handle this new supply and can get it anywhere in America and to much of Europe if need be. The foresight, and how quickly U.S. regulators are moving, underscores the emerging legacy of American energy independence.
In a nutshell, this is OPEC's, and Canada's, nightmare: Cheap, abundant, American energy.
Imagine your oldest ally and largest customer becoming a politically demanding competitor. That American shale oil, which was once so costly to produce, is no longer.
Can you imagine the Iranian government's reaction reading this as the U.S. continues to intensify sanctions? America, with its seemingly overnight energy independence, is strengthening its geopolitical influence for decades to come.
In stark contrast to the Canadian oil patch, the U.S. gets pipelines approved and built quickly...
As the Bloomberg article explains, three pipelines are set to come online next year, carrying as "much as 2 million barrels of oil a day," to the Gulf for export.
But that is not all. Check out what may be in store for 2020:
Don't You See, Canada?
Three more U.S. pipelines are potentially coming online in 2020 for a total of six new pipelines in a couple years. Meanwhile, Canada hasn't figured out how to get ONE new domestic pipeline built this century.
While Canada certainly has internal domestic squabbles over pipelines,
factions within the U.S. are helping keep Canada's energy landlocked via their own professional activists. And the U.S. government doesn't mind at all...
Despite all the rhetoric, every U.S. president over the last twenty years, that includes Trump, is happy Canada can't get its most valuable commodity to any other country, specifically China. U.S. leadership is content with Canadian oil being its emergency source for many decades into the future.
Canadians can complain that the Harper government didn't do enough consulting with indigenous groups, or Trudeau's Liberals haven't shown enough political will for pipelines, or created a predictable oil-friendly regulatory environment, but the frustration is somewhat misguided...
American special interest groups, and its government, have been instrumental in keeping Canada's oil industry in check. While this somewhat conspiratorial viewpoint has been written about at length, a recent example of U.S. interventionism in Canada's economy, and potentially its oil industry, may be found in section 32.10 of the new USMCA.
The Chinese government claimed,
"this clause amounts to an act of political dominance by the U.S., which it blames for inserting the clause some argue gives the Americans a veto over Canada and Mexico pursuing free trade with China," according to Global News...
What happens if the Trans Mountain pipeline twinning 'concept,' which was nationalized by Trudeau just a couple months ago, is built? We all know it is intended to get Alberta oil to China. Does the U.S. get a say in whether Canada makes a new long-term oil supply agreement with China?
Something else to consider...
Look at the Keystone XL pipeline. This was approved in Canada years ago, and has the support of both the Conservatives and Liberals. It would have the capacity to take 830,000 barrels of Alberta oil per day to the U.S. George W. Bush says he supported it, Obama rejected it, and Trump said he's a staunch supporter of it being built. It literally went through nearly a decade-long review process, with moments of apparent imminent approval and rejection along the way. But once Trump was elected, it was viewed by many as a shoo-in to be built...
Almost immediately after being elected, Trump gave Keystone XL his blessing, and it appeared to be ready for construction (at least America intended to give that appearance).
That was, of course, until
one judge in Montana rejected it yet again this month, stating it required yet another environmental review. Naturally, Trump said he was disappointed. However, the reality is he had to say that or his entire base would dissolve.
Trump and every other U.S. president who has held office during this proposed pipeline review, likely doesn't want Keystone to be built.
Obama was just the only one who actually admitted it (albeit in the name of the environment, which was likely secondary to America's hegemony over Canada).
Now, with construction of new Canadian pipelines at a standstill, and America importing less oil while simultaneously becoming the world's largest producer by far, it looks bleak for the Great White North's oil patch.
Get Ready to Enjoy Cheap Oil Prices for Longer
U.S. inventories are gushing. Signs of rising inventories began showing up in October when the American Petroleum Institute (API) reported a huge build of 9.88 million barrels of U.S crude oil for the week ending October 19th.
According to oilprice.com, analysts expected a build in crude oil inventories of 3.694 million barrels.
On Wednesday, November 21st, the Energy Information Administration reported U.S. commercial crude oil inventories climbed by 4.9 million barrels to 446.91 million barrels last week.
After about a year of back and forth declines and increases, crude inventories are now putting together consecutive weeks of increases:
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source: Trading Economics |
The
EIA also confirmed U.S. crude oil production remains at a record 11.7 million barrels per day (bpd).
All the while, President Trump is pressuring Saudi Arabia to keep production up to "prevent prices spiking higher again."
Trump was quick to brag just before Thanksgiving, tweeting:
Wrapping Up
Record oil production in the U.S., Russia and Saudi Arabia are one side of the coin. Rising interest rates in the United States amid weakened global growth forecasts are on the other...
Do not overlook the U.S. and Canada's decision to continually raise interest rates, due to strong economic growth and rising inflation. But when you step outside North America you begin to see things are not going so well from much of the West. There are still four major economies with negative rates: Japan -0.10%, Sweden -0.50%, Denmark -0.65% and Switzerland at -0.75%. Never mind the entire Euro Area which remains stuck at 0%. Even the United Kingdom and Norway still have rates at 0.75%. That shows economic fragility.
With many economists and money managers believing the U.S. will enter a recession sometime in 2019 or 2020, significantly higher oil prices seem unlikely in the next couple years.
"The oil market has also been weighed down by weak Asian and European markets as investors fret about slowing global growth in the face of rising U.S. interest rates and trade tensions."
So, record production from Russia, Saudi Arabia and the U.S., along with global growth uncertainty, have now pushed oil prices into bear market territory. The lesson to be gleaned is that U.S. shale got smart. When the Saudis flooded the market with oil back in 2014, in a bid to bankrupt U.S. shale producers, it backfired. They became more efficient.
Shale producers in the United States figured out how to extract for less with some boasting profits at US$30 WTI per barrel. Another factor worth considering is Trump's energy policies. The environment he has created for the oil sector in the U.S. in just two short years is nothing short of remarkable.
Trump will continue to do the dance with Saudi Arabia, putting American wealth ahead of virtually all else. Meanwhile, American consumers will see and remember lower prices at the pump - likely boosting the President's approval rating. Trump's presidency is probably the greatest threat to Canada's energy sector since the National Energy Program of the 80s. Imagine having the third largest oil reserves in the world (approximately 170 billion barrels) and no means to export it to international markets... outside of America. That's Canada's reality. A reality which has been crafted, at least in part, by American governments and special interest groups.
All the best with your investments,