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A recent negotiation standoff between OPEC and the United Arab Emirates left investors wondering whether oil production would be ramped up enough to meet growing demand. Luckily, it appears the two sides have reached a tentative agreement and will meet once again in the coming months to hammer out the details. Still, this is a disconcerting piece of news that could have an effect on investors and the Canadian economy as a whole.
OPEC and the Canadian Economy
A lack of supply from OPEC and the UAE won’t necessarily hurt the Canadian economy. Even as the country opens up and the demand for oil increases, between its local reserves and imports, Canada should be able to weather any oil shortage from the Middle East. For one, Canada has the third-largest oil reserves in the world, and even though the country still imports from foreign suppliers, it is mostly coming from the United States, which accounted for 77% of Canada’s Imports last year.
This also presents an even bigger opportunity for local oil producers within Canada to ramp up production and increase their profits along the way.
A Swoon for Local Oil Production
While consumers might feel the pain of higher commodities prices, local Canadian oil producers are welcoming this new market paradigm. The continued supply constraints by OPEC mean Canada is more reliant on domestic oil production.
Oil production in Canada has already been on the rise, hitting record levels of production this year. This also puts Canadian producers in an enviable position of controlling supply for export to its US neighbors and abroad who will need to have their growing demand needs to be met.
The province of Alberta is likely to see the biggest economic impact of higher oil, as it’s the country’s largest oil and natural gas producer thanks to its large supply of oil sands. In total, 11% of Alberta’s government revenue came from oil and gas resources as of 2019. And recent reports indicate that oil sands production in Canada as a whole now exceeds pre-pandemic levels, with production expected to hit 3.8 million barrels per day by 2030.
Canadian producers like Baytex Energy are finally seeing the higher oil prices they had been expecting for several years, leading to future optimism for the industry. “We are enormously excited about it and it’s probably ahead of our expectations by certainly two to three years,” said Baytex CEO Ed LaFehr. “We thought we would get to $60, not $70…All around, this is the strongest I’ve felt in five years in Baytex.”
Where Does Oil Go From Here?
As the price of oil and gas rises in the short term, investors are left wondering whether crude oil above $70 will be sustained for the foreseeable future. This should be examined from both the supply and demand sides.
We’ve already discussed the hesitancy of OPEC and its partners to increase oil production, which could cause a short-term shortage in the global markets. However, its most recent production deal does show its willingness to ramp up production as it sees fit. On the demand side of things, it appears consumers are hungry to get out and explore the world after being locked at home for the past year due to the global pandemic.
It’s expected that through the Summer months and into the Fall, consumers will generate significant demand for oil as they look to travel and consume more than ever before. In fact, OPEC expects oil demand to reach its pre-pandemic levels by 2022, earlier than some might have previously expected.
Oil remains at the whims of the classic economic supply and demand curve. And while OPEC controls a majority of the world’s oil reserves, Canada remains an important player in the oil and gas market to the point where it stands to gain tremendously if oil prices rise and OPEC continues to curtail its production.
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