Oil surges to 7-year high after OPEC+ decides on cautious increase

Oil prices jumped Monday after OPEC and allied oil producing countries stayed with their gradual approach to restoring output slashed during the pandemic, agreeing to add only 400,000 barrels per day in November.

The decision by the oil cartel, along with non-members including Russia, is in keeping with its established schedule of adding back that amount of oil every month until deep cuts made in 2020 to support prices during the depth of the pandemic recession are restored next year.

The situation has changed since then as the global economy recovers. The decision comes amid stronger demand for oil products like gasoline and jet fuel, as driving and flying pick up around the globe due to the easing of restrictions aimed at containing the COVID-19 pandemic.

On top of that, unusually high prices for natural gas are pushing some electricity producers in Asia to switch from natural gas to oil-based products, helping support prices.

The price of a barrel of crude hit $78.38 US, the highest since 2014, then eased to trade two per cent higher on the day at $77.87 US on the New York Mercantile Exchange. The Brent international benchmark was at $81.57 US, up nearly three per cent.

"Producing nations, and namely OPEC+, have to be careful not to allow prices to inflate too much, otherwise we may see an adverse reaction that could negatively impact post-pandemic economic growth," said Bjornar Tonhaugen, head of oil markets at Rystad Energy.

"Nevertheless, OPEC+ will surely keep on monitoring market developments and can amend policy going forward if needed," Tonhaugen said. OPEC+ scheduled its next meeting for Nov. 4.

The rise in prices could spur more hiring in the Canadian oilpatch, which saw significant staff layoffs over the past seven years as low crude prices forced companies to grind down costs. 

"We haven't seen these prices since 2014," said Jeremy McCrea, director of energy research at Raymond James. "This is really a moment where a lot of these Canadian producers are doing well in the current market."

McCrea said oil and gas companies are using improved cash flow to improve their balance sheets and pay down debt. Now, he also expects that hiring will pick up.

"A lot of companies we've talked to are running very lean and do recognize here that maybe we did cut a little bit too much to the bone back in 2020 in terms of layoffs. 

"And now they're looking to get some of these guys back here."

Another benefit for domestic producers is that the price gap between the U.S. and Canadian oil benchmarks — West Texas Intermediate (WTI) and Western Canadian Select (WCS) — has also narrowed, to around $10 to $12 a barrel.

Things could improve further with last week's announcement by Enbridge that its Line 3 pipeline replacement project  — which will carry oil from Alberta to Enbridge's terminal in Superior, Wis. —  is "substantially complete." 

"We believe that the startup of Enbridge's Line 3 should eliminate the need for rail, which should lead to a tighter WTI-WCS spread due to lower transportation costs," Randy Ollenberger, an analyst with BMO Capital Markets, said in a research note to clients.

However, there is concern about how rising oil prices might impact global economic recovery. Bank of America warned recently that prices could hit $100 US a barrel for the first time in years this winter.

Canadians saw gasoline prices spike over the summer months and may also face rising heating costs this winter due to higher natural gas prices.

In the United States, White House national security adviser Jake Sullivan raised concerns about rising oil prices when he met officials in key OPEC member Saudi Arabia earlier this week in talks that largely focused on the war in Yemen, according to a senior administration official who spoke on the condition of anonymity to discuss private conversations.

Sullivan and other members of his delegation reiterated the importance of creating conditions to support the global economic recovery caused by the coronavirus pandemic, the official added.

Denton Cinquegrana, chief oil analyst for OPIS by IHS Markit, believes it would take a "perfect storm" of events for oil to reach $100 US by Christmas. 

"We'll stay up around these levels until we find some indications where supplies are increasing, maybe not just here in North America, but globally," Cinquegrana told CBC News.