A pumpjack works at a well head on an oil and gas installation near Cremona, Alta.The Canadian Press
Jeff Hanna figured it would be a fun, short-term promotion for his restaurant and bar in downtown Calgary.
It was January, 2015, when Mr. Hanna advertised a special at Barcelona Tavern on 8th Avenue: Customers could get 20-per-cent off the price of any bottle of wine in his cellar, between 11 a.m. and 7 p.m. on weekdays, until oil returned to $70 (U.S.) a barrel.
Surely it would only be a few months, he thought. But almost 2 1/2 years later, Barcelona's "Time to Wine About Oil" offer is still on the menu. With U.S. crude slumping back into the mid-$40 range over the past month, Mr. Hanna will be marking down the vino for a while to come.
He has pledged to honour the deal for an appreciative oil-patch clientele who have suffered job losses and uncertainty. The mood up and down 8th Avenue appears to have worsened again.
"It really is a roller-coaster ride – I hate to say it," Mr. Hanna said. "I mean, when we spike to $50-plus in oil, you see that everyone has a little higher spirits. Then it becomes a little more sombre when it drops again. You hear about more layoffs on the news, et cetera, and that's just a reality check for everyone again. You say, 'Oh my gosh, we're still in this thing pretty deep.'"
He's right. One can almost track the local emotional state by the performance of an exchange-traded fund – the one based on the S&P/TSX capped energy index. It includes the shares of a range of integrated oil companies, exploration and production firms and oil-field service providers.
The ETF is down more than 11 per cent this year, a time when most industry analysts projected that a recovery would be well under way, largely owing to the Organization of Petroleum Exporting Countries' renewed sense of responsibility for providing a floor for oil prices.
Instead, crude oil is down again, even as a meeting of OPEC ministers approaches. In the old days, such gatherings used to bring anticipation that the ministers would extend production quotas and juice prices. Now, OPEC's efforts to provide comforting words to oil markets appear to be falling on deaf ears.
The cartel is due to meet in Vienna on May 25, and all indications are that the current output ceiling, in place since January, when the group and its non-OPEC allies cut production by 1.8 million barrels a day, will at least be maintained. Saudi Arabia's Energy Minister, Khalid al-Falih, said Monday that OPEC will "do whatever it takes" to restore balance to the oil world. The market response? "Yeah, whatever."
Despite the cuts – and apparent discipline in sticking to them – the glut that has put pressure on prices since before Mr. Hanna started discounting pinot noir has persisted. All signs point to another culprit: the U.S. shale industry.
Production in the United States has rebounded so quickly that it has thrown markets off kilter. Output is up 10 per cent since mid-2016 to 9.3 million barrels a day, according to the Energy Information Administration, propelled by a new drilling rush and technological improvements that have boosted efficiency well beyond what was possible only two years ago. The EIA predicted production would hit a new high of 9.96 million barrels a day next year.
Canada, too, has been on a roll production-wise, despite big cuts in corporate spending. A good portion of the new output is the result of projects in the oil sands that were sanctioned before the crash.
It all means OPEC's cuts are really aimed at fighting a problem that existed when they were hammered out last fall – not the ones that have cropped up since then.
Not everyone sees the trend going on indefinitely. Last week, GMP FirstEnergy commodity forecaster Martin King told a Calgary Petroleum Club audience that U.S. supply cannot sustain a pace indefinitely that will offset other supply cuts, meet demand growth and replace natural declines. The law of diminishing returns still applies in the shale age, he asserted.
He expects a barrel of West Texas intermediate to average $56.50 this year and $65 next year – still a far cry from the fading memory of $100 in 2014. In fact, by Mr. King's estimation, crude won't climb into the $70 range until 2019.
So, for the regulars at Barcelona Tavern, bottoms up.
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