Canada’s biggest oil refinery came in for some unwanted scrutiny and Alberta put itself forward as a more stable source of supply in the wake of the devastating drone strike on a Saudi oil production facility over the weekend. But within days of the attack, analysts were already talking down the impact the attack by Houthi rebels would have on global oil supplies or prices.
In the immediate aftermath of the attack, which took out more than half of Saudi Arabia’s oil production, the price of benchmark Brent crude went up 20%. CBC reported on rising fossil stock prices and projected an increase in fuel costs, while the Globe and Mail saw similar gains for U.S. fossils.
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But a day later, oil prices dropped back by 6%, after Saudi Energy Minister Prince Abdulaziz bin Salman said his country had managed to restore supplies to their previous levels. And even at the height of the initial price surge, the Globe was questioning how long it would last in light of “lacklustre” global demand for oil.
“The factors required for a continuing [fossil] energy [price] rally are complex, as investors weigh the severity of the attacks on Saudi Arabia against a slowing global economy with a declining appetite for crude oil,” the paper wrote. “The U.S. Energy Information Administration, which has been frequently cutting its forecasts for oil demand all year, now expects oil consumption will increase just 0.9 million barrels a day in 2019—potentially marking the slowest growth since 2011.”
“We’ve all been conditioned to assume that major outages are bullish for the crude oil market, and they are,” said Michael Tran, managing director in the RBC Dominion Securities energy research team. “But in a weak demand environment, that complicates things.”
At the same time, “when we think about the lesson from the weekend, it’s a lesson in vulnerability,” he said, echoing other analysts who predicted closer attention the “political risk premium” in Saudi oil. “Even if the current situation normalizes quickly, the threat of sidelining nearly 6% of global oil production is no longer hypothetical.”
In that light, Scotiabank commodity economist Rory Johnston said Canadian fossil producers might see renewed discussion about secure crude oil supplies. “Historically, we’ve seen more of the sentiment toward the Canadian oil sector as being couched in terms of oil security, which as a concept has kind of fallen by the wayside,” he told CBC. “This will likely raise that energy security narrative back to the forefront of public discussion, which all else equal, should benefit the Canadian oilpatch as a source of secure supply—politically secure, and right next door to the United States.”
Alberta Premier Jason Kenney echoed that message, tweeting that “the strike on Saudi refineries should be a wake-up call” and touting Alberta as “the most secure major source of energy” in the world.
Kenney was also looking at scaling back the province’s oil production cuts and allowing Canadian fossils to increase their exports, CBC and the Globe and Mail reported. But Judith Dwarkin, chief energy economist at RS Energy Group, said the world’s existing oil stockpiles plus the recent scale of U.S. production should be enough to limit the impact of the drone strike on global oil prices.
“Global supplies will rearrange themselves to meet demand wherever it is,” she told the Globe. “Canada is pretty much producing at capacity currently—it’s not like we have a bunch of spare capacity lying around that we can suddenly call into play and send out by pipeline or ship, never mind get it to the coast so it can get on a ship. But I think this is a situation for governments to release strategic reserves if they so feel.”
An almost immediate effect of the drone strike was the attention it drew to the private refinery in New Brunswick that accounts for most of the Saudi oil imported to Canada. “Nearly all of the kingdom’s oil shipments to Canada travel to New Brunswick, home to a single refinery, Irving Oil Ltd.’s Saint John plant, which can process about 299,000 barrels a day,” Bloomberg reported Monday. “The refinery relied on Saudi crude for more than 40% of its supplies in July,” the news agency added, citing Statistics Canada data.
Bloomberg said a longer-term supply disruption would be “especially problematic” for the Irving plant since it depends mostly on imports. But “it’s more likely to play out on a price effect, rather than physical shortage” of oil, said Kevin Birn, director of North American crude oil markets at IHS Markit. The Irving refinery “does have the flexibility to shift to other supply sources,” Bloomberg said, citing Birn, and “shipments from Saudi Arabia that take weeks to arrive to eastern Canada would already be on the water”.
