Deloitte Canada forecasts continued energy price volatility

Calgary, January 9, 2023 – According to the latest Deloitte Canada Oil and gas price forecast “Energy costs are stretching price elasticity and energy affordability”, ongoing geopolitical uncertainty, along with continuing concerns about a possible global recession and more interest rate increases, has created significant volatility in crude oil and natural gas prices that is likely to continue throughout this winter.

“We expect natural gas producers will continue to align their production to demand and be careful about additional development,” said Andrew Botterill, national Oil, Gas & Chemicals leader at Deloitte Canada. “Weather and storage levels will still be major influences on gas prices, which we do not see reaching elevated levels for long, if at all.”

The forecast also notes that a US$60 per barrel cap on the price of seaborne Russian crude imposed by the European Union, the G7 group of nations and Australia is adding to price uncertainty as it is unclear how China and India, large importers of Russian crude, will react and whether Russia will reduce its production and further disturb global supply. With the continued geopolitical uncertainty, the first quarter of 2023 is likely as volatile as the previous year. Prices have generally declined since their peak in the summer of 2022. China's move away from the zero-COVID policy, which had reduced demand from the world's largest consumer, boosted crude prices at the beginning of December.

“The added anxiety of a cold winter in full swing could extend the ongoing volatility,” said Botterill. “Russia’s invasion of Ukraine was the principal driver of in 2022, but so too was China’s attempt to control the spread of COVID-19 by locking down whole cities and regions, reducing its economic activity and driving down its demand for energy supplies.”

“The higher cost of energy has also had a major impact on the price differentials between Western Canadian Select and West Texas Intermediate” said Botterill. “These differentials started in 2022 at about US$13 per barrel but reached more than US$25 per barrel heading into 2023. The United States released 180 million barrels from its strategic petroleum reserve to lower gasoline prices in the U.S., reducing demand from U.S. refineries for Canadian crude. Refiners also shied away from Canadian crude because the energy costs to refine heavy oil are higher than those of refining light oil.”

Natural gas prices also saw large price swings in 2022, with Henry Hub starting the year below $4/mmbtu USD, rising sharply to just under $10/mmbtu USD during the summer and settling back to between $5-$6/mmbtu USD by the fall. Canadian natural gas prices were even more volatile, falling from just under $9/mmbtu CAD in the spring to negative territory in the fall during pipeline maintenance periods, before recovering to between $5-7/mmbtu CAD in the latter part of the year. Despite these higher prices, there has not been a spike in natural gas production in either Canada or the U.S., something Deloitte attributes to uncertainty around future prices.

According to the price forecast, policies in Canada such as the proposed emissions cap announced at COP27 and the commitment to define and phase out Inefficient Fossil Fuel Subsidies by 2025 could add to the economic costs some businesses are already feeling.

In a companion analysis by Deloitte spotlighting the impact of energy costs on economies, there is little relief in sight, with higher energy costs contributing to rising inflation and growing risks for supply chains, investment and jobs. The transition to renewable energy sources could expand inflationary pressures further, noting that it costs more to produce the same amount of energy from lower density sources such as solar and wind than from traditional energy sources such as gas and nuclear.

For Deloitte’s complete oil and gas price forecast and its spotlight analysis of how energy costs are stretching price elasticity and energy affordability, visit our website.

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