Canada’s Move, Not Qatar’s, Is Big News For Oil

SMITH BRAIN TRUST – Qatar’s surprise announcement this month that it was quitting OPEC after more than 50 years as a standing member had analysts wondering what it would mean for the 15-member oil cartel and for oil prices.

But it was a quieter development, some 6,000 miles away in Canada, that is likely to have a far more significant impact on oil prices, says Charles E. Olson, professor of the practice in the logistics, business and public policy department at the University of Maryland’s Robert H. Smith School of Business.

“The move in Alberta is quite significant,” says Olson, who is also director of Maryland Smith’s Business Honors Program.

In a highly unusual move on Sunday, Alberta Premier Rachel Notley announced that she would force companies operating in the oil-rich Western Canadian province to slash crude output by nearly 9 percent next year. The policy is aimed at propping up the sagging price of oil. That amounts to a cut of roughly 325,000 barrels a day of the raw crude and bitumen pulled from the oil sands.

Oil sands producers are facing market headwinds amid a shortage of so-called takeaway capacity, Olson says. In other words, the limited capacity to be able to move the oil at a reasonable cost to a marketplace where it can command the world price. It’s part of a broader headwind that the Organization of the Petroleum Exporting Countries, or OPEC, is likely to address at a meeting this month, when they are expected to recommend cutting total global output by 1.3 million barrels a day from October levels.

Canada is the world’s fourth-largest producer of oil. But its drillers have been hurt by the inability to build and expand oil pipelines, including the still-stalled Keystone XL pipeline, Olson says.

“A reduction in the total output of oil should help Canada significantly,” Olson says. “Because although they’ll be producing and selling less oil, the price they will be selling at will be much higher. And they’ll still have reserves in the ground that they have not squandered at these low prices.”

Qatar was never a big member of OPEC. "They are a longstanding member, but their resource today is mainly natural gas,” Olson says. That’s why the country’s exit is largely symbolic, and unlikely to move markets.

Qatar produces 600,000 barrels of oil a day, Olson says, compared to Saudi Arabia’s 11 million barrels per day. “It’s tiny," he says. "And shrinking.” Qatar meanwhile has the third-largest reserves of natural gas in the world. “That’s why Qatar’s interest lies much more with natural gas than with oil, so its membership in OPEC was maybe never that meaningful.”