Oil and gas prices expected to ease after strong first quarter
Higher OPEC+ production should help meet increased global demand
Calgary, April 6, 2021 – Crude oil prices that surged in the first quarter of 2021 due to improved global economic activity and ongoing rollouts of COVID-19 vaccines are expected to ease in the coming months as producers work to increase supply to meet demand, according to Deloitte Canada’s Resource Evaluation and Advisory (REA) group. In its latest report, the group says a market correction is likely as more supply becomes available, although North American production is not expected to return as quickly as previously thought.
“Demand for oil outpaced supply in the first part of this year, driving up the benchmark price of Brentwood and WTI crude by about a quarter, but producers are now beginning to close that gap, putting downward pressure on prices,” said Andrew Botterill, national Oil & Gas leader at Deloitte Canada. “We also saw an atypical increase in crude storage volumes in the United States in February when a winter storm and record low temperatures shut down many refinery operations in Texas. As this excess storage comes back into the market, demand and supply should return to a better equilibrium with a corresponding impact on prices.”
Botterill says Canadian producers had a good first three months of the year, with implied differentials to West Texas Intermediary remaining favourable and prices returning to pre-COVID values. Production levels in Alberta were also back to pre-COVID volumes, reaching 116 million barrels in January, up 3.6 per cent from 2020 levels. That said, Deloitte expects members of the OPEC+ group of oil-producing countries to ease their current production curtailments in 2021, limiting the ability of other producers to ramp up their own production to take advantage of higher prices.
“Furthermore, the capacity for growth in Western Canadian oil production is in doubt in the short term because of the revocation of the Keystone XL cross-border permit. Current pipeline export capacity has reached its limit of about 3.6 million barrels a day, although crude-by-rail can add another roughly 400,000 barrels a day,” said Botterill. “This should change, however, as the Line 3 and Trans Mountain expansion projects are completed in the next few years, with export capacity rising to more than 4.5 million barrels a day.”
Deloitte says prices for Canadian natural gas also rose in the first quarter of 2021, as demand in the United States shot up because of cold weather across much of the country and reductions in US production due to winter storms. The resulting higher exports from Western Canada led to AECO price increases beyond those usually expected during periods of cold weather. With Canadian gas storage levels below the five-year average and producers seeking to maximize cash flow while keeping production flat, Deloitte says prices are expected to remain steady through the rest of 2021.
View Deloitte’s complete oil and gas price forecast dated March 31, 2021.
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