Oil surges toward $70 and stirs dreams of $100

Three years after the devastating oil price crash, optimism is back in the industry as prices are surging toward$70 US per barrel, andthoughts of $100 return.

The rosy outlook is a far cry from early 2016, when prices dropped below $30 US per barrel.

The enthusiasm has even spread to Alberta, although it is tempered. Prices are climbing on the Prairies, at least for the time being.

First, Bloombergreported one week ago Saudi officials were pushing to get oil up to $80 a barrel, then Reuters reported some are now talking of hitting the century mark.

"I think some people would hope for that, but I don't think anyone is planning for it," said Jackie Forrest of the Calgary-based ARC Energy Research Institute.

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The main driver for the oil rally is a fall inthe amount of global crude inventory as demand outstripssupply.

"The excess capacity that was sitting in storage tanks around the world is gone. We don't have that spare capacity to draw on anymore," said Forrest."The outlook for most of this year now is that we will be in a slight deficit."

New data this week showedlarger-than-expected draws of crude from storage facilities in the United States. TheEnergy Information Administration reported U.S. crude stockpiles fell by 1.1 million barrels last week, while gasoline demand was ramping up in advance of the summer driving season.

"That always seems to give traders a reason to trade up," saidJudithDwarkin, chief economist with RS Energy Group,about the inventory data.

Political unrest

Besidethe fundamentals of supply and demand, Dwarkinsays, other factors are at play in the rising value of oil, such as geopolitical speculation, which she describes as "fluff."

New sanctions could be imposed on Iran, while violence in Syria and Yemen could impact oil production from the Middle East. There is "greater uncertainty swirling" around these political developments, according to Dwarkin.

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Disruptions in supply would drive up prices, and even the hint of turmoil in an oil-producing country often results in the value of the commodity notching up.

Meanwhile,oil officials from OPEC, Russia and other big producers are meeting this weekend and are expected to continue their oil production cutsthrough the rest of the year, and possibly into 2019.

Brief boost in Alberta

Since October, oil prices in North America have climbed by more than $15 US per barrelfor West Texas Intermediate (WTI). Western Canadian oil producers have largely been shut out from enjoying the rising values, as export constraints put a lid on prices on the Prairies.

Alberta's Western Canada Select was selling for more than $30 US per barrel less than WTI in February, negating the oil price rise elsewhere around theglobe. The WCS-WTI differential has since narrowed to about $17, but is still distant from the usual average of about $10.

The poor differential has not gone unnoticed.

Last month, Cenovus Energy said it was running its oilsands operations at reduced production rates and was storing excess barrels. The company said export pipeline capacity was at a"critical shortage" and was hurting the industry and the Canadianeconomy.

Export dilemma

There is no short-term answer to the pipeline woes of the industry, especially after Kinder Morgan suspended work this month on the Trans Mountain expansion project amid the continued political and court battles surrounding the proposed project. Rail shipments of oil are increasing in Western Canada, however that could be impacted by a potential strike at CP Rail.

Part of the reason the differential has narrowed recently isplanned maintenance at some oilsandsfacilities, which has reduced some production and freed up pipeline space. That's why experts saythe increase in Alberta prices may be short-lived.

Oilsands production is growing as projects like Suncor'snew Fort Hills facility slowly rampup to full production.

"I don't think that phenomenon will stick around for the rest of the year," said Forrest, with ARC.

"When all the upgraders are running full out and those oilsands projects are ramping up, we have more supply than we have takeaway, and I expect those wider differentials will return."

Canada's oil industry is expected to return to profitability in 2018 after threeyears of losses, according to a report this month by the Conference Board of Canada. The organization estimates the sector will register pre-tax profits of$1.4 billion this year.

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