OPEC+ surprised some in the energy market with its recent decision to extend oil production cuts, the United States is now India’s No. 2 oil supplier, and Canada’s government is embarking on creating a federal carbon trading marketplace.
Biweekly, we round up news and analysis about three things going on in the energy industry that we think you should know about. Here’s the latest.
OPEC+ extends cuts
In a surprising move in its meeting this month, OPEC+ extended oil production cuts. The global supply and demand balance has tightened significantly in recent weeks, as evidenced by increasing oil prices. In light of that, many market participants anticipated OPEC+ to announce production increases. Evidently, OPEC+ is taking a cautious approach by extending cuts for all members, with the exception of small increases for Russia and Kazakhstan.
Increased optimism related to signs of improvement in the pandemic, the accelerating vaccine rollout in the United States, and continued unrest in the Middle East imply a continued tight balance, supporting high prices. With prices at these levels, and OPEC+ production holding steady, there is a clear path for producers in the United States to increase production. In fact, last week, Chevron revealed plans to increase investment and production in the Permian Basin. We will be watching to see if other producers follow suit.
The United States overtakes Saudi Arabia as the second largest supplier of oil to India
The United States last month became the second largest oil supplier to India, overtaking Saudi Arabia, which has long been in the top two of India’s suppliers but which dropped in line to No. 4, Reuters reported this week. (Iraq is India’s No. 1 supplier.)
Asia has experienced demand recovery while demand in the United States is still weak coupled with refineries running at low rates, creating a solid case for exporting oil to India. India’s imports from the United States rose 48% to a record 545,300 barrels per day in February from the prior month, accounting for 14% of India’s overall imports last month, according to Reuters. The trigger for the switch was lower U.S. crude demand coupled with Saudi Arabia’s announcement to voluntarily cut 1 million barrels per day and the OPEC+ agreement to extend production cuts.
Creating a federal carbon trading marketplace in Canada
The Canadian federal government earlier this month proposed creating a nationwide marketplace for trading carbon credits with the goal of reducing greenhouse gas emissions. Canada has released draft regulations for the Federal GHG Offset Credit System, which is currently in a 60-day period for public comment.
The new system, which is expected to go into effect later this year, allows qualified projects to generate carbon credits, with one carbon credit equal to one metric ton of carbon dioxide reduced. Companies can then earn revenue by selling their carbon credits through a newly created tracking and verification public registry to industrial emitters in need of offsetting their own GHG emissions. The intended goal is to incentivize investment in emission-reducing innovations, such as carbon capture and sequestration, while at the same time reducing carbon expenses for emitters exceeding their limits, without a net increase in emissions.
Qualifying projects are aimed primarily at the forestry, agriculture, and waste sectors, and industries regulated under Canada’s Output-Based Pricing System are eligible to buy the carbon credits. As a result, prices for carbon credits, which will be set by supply and demand in the domestic marketplace, are expected to be capped by the carbon tax set each year by Environment and Climate Change Canada. In 2021, that price is $40 per metric ton, expected to jump to $50 per ton in 2022 before reaching $170 per ton by 2030. Emitters without carbon credits will be subject to pay the carbon tax.
We expect that the new offset system will lower the cost of GHG emissions for those in the energy industry otherwise subject to paying the federal carbon tax, similar to the Western Climate Initiative (WCI) with Quebec, Nova Scotia, and California. The WCI is a cap-and-trade arrangement between the three jurisdictions to trade emissions allowances and was opted into instead of the carbon tax by Quebec and Nova Scotia.
The most recent auction held in February saw an average qualifying bid of approximately $24 per metric ton for credits; lower than the $40 per ton for the carbon tax in 2021, and we expect that auction prices will not rise at the same rate as the federal carbon tax over the next 10 years. Lowering carbon costs, without increasing GHG emissions through the offset system, will also benefit end consumers of products such as gasoline and natural gas heating, who typically have the costs passed down to them.