There are three trends at play when it comes to the North American oil industry.

These are supply drops, seasonality and consumer behaviour changes, says Scott Vali, formerly vice-president, equity, for CIBC Asset Management.

First, “if we look at supply in North America, we’ve seen production drop by about a million barrels per day since the peak in June of 2015,” he explains. “To put that in context, the U.S. had been growing production by about a million barrels a day, so that’s a two-million-barrel-a-day delta relative to the trend we were on going into June of 2015.”

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Much of this current decline in production is due to the lower operating rig count in North America. “That’s just [the] reaction of E&Ps [exploration and production companies] to the lower oil price and a cutback in their exploration budgets,” says Vali.

Conversely, over the same period, OPEC has seen a production increase. “The main source of that growth has been Iran, where the sanctions were lifted by the United Nations Security Council,” says Vali. “We’ve seen their production and exports into the market grow, offsetting some of the decline in production that we’ve seen in North America.”

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But overall, there’s been “a tightening of the oversupply situation globally,” he adds.

Seasonality is the second issue affecting oil prices, Vali notes. “We’re exiting the highest demand period of the year, which is the summer driving season. We’re starting to see some of the longer-dated contracts deteriorate slightly in terms of pricing coming down.”

As a result, he adds, “the market is starting to rebalance as we look forward.”

Lastly, low gas prices are impacting attitudes toward fuel efficiency. “With lower prices at the pump, consumers are shifting their purchasing behaviours. We’re seeing a pickup in the number of SUVs and pickup trucks being sold, relative to small cars.”

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Consequently, auto manufacturers like Fiat Chrysler have indicated they will be investing more into producing larger vehicles. “That’s in reaction to a population base that is now shifting their purchasing behaviour to larger vehicles that are less fuel-efficient,” says Vali.

In fact, for the first time this year, “The average fuel efficiency of a vehicle in North America has actually paused. That’s an important aspect of what we’re looking at in the market.”


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