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Wildfires burning out of control in Fort McMurray

Fort McMurray, the heart of much of Canada’s heavy oil sands production, has been evacuated due to a wildfire burning out of control in and around the city. The evacuations have forced the oil sands operations in the surrounding area to lower production as works and their families flee to safety. Operators in the region collectively produce more than 500 MBOPD, reports BNN, meaning the outages will lend support to oil prices.

Reports from Reuters estimate that at least 640 MBOPD, roughly 16% of Canada’s total output, have been taken offline due to the fires, with more outages expected.

Who’s Shutting Down in the Oil Sands, Who Isn’t?

Oil prices up on Fort McMurray fires

  • Shell Canada (ticker: RDSA) shut down output at its Albian Sands located north of Fort McMurray;
  • Suncor Energy (ticker: SU) said the Millennium and North Steepbank mines, its main oil sands project, were not in danger, but it is operating with fewer staff and producing less;
  • Syncrude Canada also reduced the number of people and machines working at its Mildred Lake oil sands mine north of the city;
  • Husky Energy (ticker: HSE) said it was cutting production at its recently commissioned Sunrise thermal oil sands project from 30 MBOPD to 10 MBOPD because the fire forced the closure of a diluent supply pipeline.

Michael Dunn, an oil sands analyst for Calgary investment firm FirstEnergy Capital, said the fire could lead to gasoline price hikes throughout the country, depending on how much damage has been done and how long it takes the industry to recover.

“If this fire does cause an extended period of misplacement of the workforce or movement of them, this may impact the output of a lot of these oil sands mines and upgraders,” he said.

“This could trickle down to crude price differentials, making light sweet crude more expensive, and might trickle down to gasoline prices if refiners need to recoup some of those margins at the pump.”

A state of emergency was officially declared earlier today as Fort McMurray’s 88,000 residents flee the fire. The fire has destroyed 1,600 structures, according to reports from BNN. The fire has intermittently cut off the southern route out of the city, forcing families to flee north to find shelter in work camps surrounding the oil sands operations.

So far there have been no reports of deaths or injuries.

Violence in Libya preventing crude from shipping

Civil war in Libya continues to interrupt crude oil production and exports, reports Reuters. A stand-off between eastern and western political factions prevented a Glencore cargo from loading. OPEC’s Monthly Oil Market Report for April reported Libyan output falling 41.4 MBOPD in the month to 345 MBOPD. Libya’s output showed the largest decline of any OPEC member in April.

The authorities that control the eastern half of Libya moved this week to block oil exports, including from the Marsa El-Hariga terminal, which represents the bulk of Libya’s exports – more than 150 MBOPD, reports The Wall Street Journal.

“I’m not sure either of these two events are going to be enough to sustain the rebound off the lows we’ve seen this week,” said John Kilduff, partner at New York energy hedge fund Again Capital.

“The Canadian blaze, horrific as it is, is far south of the real producing fields to cause real lasting damage to production there. The Libyan barrels weren’t really on the market anyway.”

Production down across all districts in Venezuela

Venezuela continues to struggle with the downturn in oil prices like its fellow OPEC member Libya as the South American country reported lower crude production in all regions in Q1’16, the first time that has happened since 2008. The country’s output totaled 2.59 MMBOPD in the first three months of the year, down 188 MBOPD from 2015, reports Bloomberg.

Completion times have quadrupled

Energy consultant IPD Latin America attributed the declines to factors including drilling challenges, natural gas compression issues and well maintenance difficulties due to restriction of field services and theft. The agency said completions now take as long as 60 days, compared with a previous average of around 15 days. Compare to some of North America’s most efficient shale operators who have dropped drilling time to 6 days with completion times following suit.

Stealing goats for food

Venezuela, which relies on oil exports for 95% of its export revenues, now faces one of the worst recessions in decades as oil prices remain depressed. Inflation reached about 181%, reports CNBC, creating food shortages so severe members of the Venezuelan military have reportedly started stealing goats to feed themselves as there is no more food in their barracks.

“It’s not a good sign when your military doesn’t have enough food, and when the military has been relegated to guarding and protecting food lines,” said Jason Marczak, director of the Latin America Economic Growth Initiative at the Atlantic Council. “This is endemic of the problems going on across the country.”

U.S. imports of crude oil continue to climb even as inventory grows

In the U.S., crude oil inventories continued to build at a much faster pace than many economist expected last week, pointing to continued bearishness in the market despite lower production in the United States.

Economists expected a build of approximately 556 MBO, but the numbers released by the DOE showed 2.8 MMBO added to crude in storage. The continued oversupply has kept downward pressure on crude prices, forcing 59 U.S. oil and gas companies into bankruptcy, and yet, U.S. crude imports continue to increase.

Information released by the Department of Energy alongside last week’s crude oil inventory build showed the U.S. imported 7.47 MMBOPD of oil in the week ended April 29, 2016. The level of U.S. crude imports has surged 20% since early May 2015, when they approached a 20-year low.

Crude oil storage facilities in other parts of the world are nearing capacity, and many traders are looking to move their excess oil to the U.S., reports The Wall Street Journal. Traders that are able to store in the U.S. while prices are low are hoping to make a nice profit once prices start to improve.

“That’s precisely why some of these traders import it, to put it in storage,” said Amrita Sen, co-founder of Energy Aspects, a London consulting firm.

Meanwhile, the backlog of crude tankers looking to offload crude cargos has created some of the world’s largest traffic jams around major ports. More than 28 MMBO are sitting off the Gulf of Mexico, more than double the normal level, waiting to offload.

The OPEC effect

Many of the additional barrels coming into the U.S. are those being displaced by production from Iran, reports The Wall Street Journal. OPEC’s monthly report showed production from the Islamic Republic increased 139.4 MBOPD in April as the country looks to regain lost market share.

As part of the ongoing battle to reenter the market, Iran has cut the price on its crude, undercutting other OPEC members in many cases. Many countries that traditional sell their oil to Europe and Asia are now exporting to the U.S. in the wake of Iranian production.

Countries like Angola, Albania and the U.K. recently delivered crude to New Jersey, California and Louisiana after Iran underpriced them, said The Wall Street Journal. These countries haven’t had much U.S. business since the shale revolution.

Interestingly, imports from Saudi Arabia to the U.S. have increased 33% year-over-year, boosting volumes back above 1 MMBOPD.

Tom Cambridge, CEO of Cambridge Production Inc. in Amarillo Texas, said he has been concerned about the increase in imports and the downward pressure that it can exert on U.S. oil prices.

Is it time for U.S. import quotas on foreign oil: you’re running on Saudi gasoline

He and a few other oil executives have been trying to drum up support among politicians to push for quotas on foreign oil imports, he said. “If you’re filling up at a station in Texas, chances are you’re running on Saudi gasoline,” Mr. Cambridge said.

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