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Canadian Crude Oil Prices Expected to Strengthen in 2020

Prospects for higher natural gas prices could also help bolster balance sheets

CALGARY, ALBERTA (January 7, 2020) – Ongoing international trade tensions and the risk of a continuing oversupply of crude oil helped push global oil prices lower at the beginning of the final quarter of 2019, while Canadian oil prices remained under pressure due to transportation bottlenecks made worse by a rail strike, according to the latest forecast from Deloitte’s Resource Evaluation and Advisory (REA) group. Nevertheless, Deloitte expects Canadian crude prices to strengthen somewhat in 2020 as a supply glut clears, helped by production curtailments in Alberta and pipeline and rail operations that are back at full capacity.

“The rail strike couldn’t have come at a worse time for Canadian oil producers, many of whom were looking to increase their crude-by-rail shipments both to overcome a shortage of pipeline capacity and to benefit from Alberta’s decision to exempt such shipments from its curtailment limits,” says Andrew Botterill, National Oil & Gas Leader, Deloitte. “Although the continuation of those limits at December 2019 levels should help improve Canadian oil prices this year, it’s also having a negative effect on the country’s merger and acquisition markets, particularly on prospective deals involving junior and intermediate producers.”

Botterill says many smaller producers have struggled to access capital to develop their assets and have little incentive to make a deal with other producers if their newly combined business becomes large enough to lose previous exemptions under the curtailment rules. He notes that M&A activity was just $600 million in the third quarter of 2019, less than one-fifth the value of such activity in the same quarter a year earlier.

On a brighter note for Canadian producers, Botterill says pipeline companies are continuing efforts to optimize the use of existing routes pending the arrival of new capacity. Over the next three years, these debottlenecking projects could add as much as 580 Mbbl/d through the use of additional pumping stations to increase line pressure, line looping in areas with limited available capacity, and improvements to scheduling and terminal operations.

“Pipeline companies believe these projects represent a low-cost, incremental way to boost capacity with minimal capital investment to construct and operate,” says Botterill.

There is also some positive news for Canadian natural gas producers as long-term demand is expected to grow with more countries transitioning to clean natural gas from other fuel sources such as coal. Botterill says exports from Canada’s West Coast to Asian markets should enjoy superior access as a result of shorter transportation distances. In 2019, however, Canadian gas production declined by three percent over the previous year, mostly due to lower capital investment and reduced rig counts brought about by depressed and volatile AECO pricing months.

“With less production in Canada, natural gas storage levels in Western Canada are now at low levels, which helped boost AECO pricing in the second half of the year” says Botterill. “Fortunately for producers, there are signs these higher prices could last beyond the winter months, which would provide some much-needed relief to their balance sheets.”

Deloitte says the oil and gas sector has seen a surge of investment in digital and innovation programs, even though many companies still have difficulty identifying the potential value to their business. It says the sector must continue to embrace digital in a purposeful manner, aligning initiatives back to a business’s overall innovation strategy and digital aspirations.

“We don’t expect high commodity prices to return soon, so innovations must deliver value at a time of volatility caused by environmental policies and regulatory constraints,” says Ian Proctor, Partner, Deloitte Digital. “For the oil and gas sector, that means using innovations to improve health and safety, reduce operating expenses, increase profitability and enable the workforce.”

Deloitte predicts continued modest economic growth for the global and Canadian economies, even as the advanced world is in the late stages of a business cycle expansion. “Overall, Canada’s economy avoided some significant dangers last year and benefitted from the easing of global monetary policy that reduced the risk of a recession,” says Craig Alexander, Chief Economist, Deloitte.

Specifically, the latest Economic Outlook forecasts the overall Canadian economy will grow by 1.9 percent this year after what it expects will be 1.7 percent growth in 2019. “Companies need to make key investments and align hiring with long-term strategic goals, but be prepared for unexpected turns in the economy and financial markets,” says Alexander.

For Deloitte’s complete oil and gas price forecast dated December 31, 2019, its insights into innovation in the oil and gas sector and its Economic Outlook, visit our website.

About Deloitte
Deloitte provides audit & assurance, consulting, financial advisory, risk advisory, tax and related services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500® companies through a globally connected network of member firms in more than 150 countries and territories bringing world-class capabilities, insights and service to address clients’ most complex business challenges. To learn more about how Deloitte’s approximately 264,000 professionals—14,000 of whom are part of the Canadian firm—make an impact that matters, please connect with us on LinkedIn, Twitter or Facebook.

Deloitte LLP, an Ontario limited liability partnership, is the Canadian member firm of Deloitte Touche Tohmatsu Limited. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

 

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