More uncertainty ahead for Western Canadian energy markets

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More uncertainty ahead for Western Canadian energy markets

Pipeline constraints and a lack of non-US markets continue to affect prices

Calgary, July 4, 2019 – Western Canadian energy markets will remain uncertain until producers have more details about whether Alberta will extend crude production curtailments beyond the end of the year and if it will proceed with rail car contracts to ease transportation bottlenecks, according to the latest forecast from Deloitte’s Resource Evaluation and Advisory (REA) group. The forecast notes that Canadian oil prices have declined since the beginning of the year as differentials to West Texas Intermediate (WTI) widened this spring at the same that WTI prices were falling due to rising domestic oil production in the United States.

“The short-term effects of Alberta’s production curtailments were higher oil prices through the first five months of the year, but prices fell back somewhat in June as many companies trying to move crude to the US encountered logistical difficulties because of delayed pipeline projects and a significant drop in the amount of crude transported by rail,” says Andrew Botterill, National Oil, Gas & Chemicals Leader, Deloitte. “However, we expect ongoing delays in pipeline projects and the widening differential between heavy and light crude to lead to higher crude-by-rail volumes throughout the rest of 2019.”

Botterill says the Alberta government’s production curtailments have irritated major integrated oil and gas companies because their refinery operations had to face increased feed stock prices. Capital budgets have also declined because of uncertainty about future government intervention and regulation, including indications from the Alberta government that it might extend production curtailments due to delays in the building of Enbridge’s Line 3 pipeline that would increase export capacity to the United States.

“There was some welcome news for Western Canadian producers this quarter with the federal government’s recent approval of the Trans Mountain pipeline project, although it will take time to create increased access to non-US markets”, says Botterill. “Nevertheless, producers are hoping this announcement will be a catalyst for investment in the sector.”

Deloitte predicts that Canadian natural gas prices, which also fell in the second quarter, will remain volatile as long as there are limited export markets other than the US, which is producing at record highs. While prices are forecast to remain low for the rest of the year, the forecast points out that actual prices are usually higher than forecast futures, as they were in the second quarter of the year when AECO prices were 14 per cent above forecast futures. Botterill notes that a number of liquid natural gas (LNG) projects in Canada could eventually provide stability to the natural gas sector and make Canada a leading LNG exporter.

The forecast predicts WTI prices to be US$55 per barrel for 2019 and WCS prices to be C$53.95 per barrel, while its latest forecast for AECO prices this year is $1.50/Mcf. Deloitte Economic Advisory says pessimism in financial markets and slowing growth in global demand has limited commodity prices so far this year, but these could post modest gains in late 2019 and into next year if financial opinion proves to have been too negative.

“The global tariff war that has arisen because of US efforts to renegotiate its terms of trade and political developments linked to Brexit have put a slight drag on world real GDP growth this year,” says Craig Alexander, Chief Economist at Deloitte. “We’re expecting Canada’s economy to see modest growth of 1.4 percent this year and a further 1.7 percent in 2020, which should keep interest rates on hold and the Canadian dollar averaging in the 73 to 75 US cent range.”

For Deloitte’s complete oil and gas price forecast dated June 30, 2019, which also looks at how the upstream oil and gas sector is employing digital initiatives to improve efficiency and productivity, visit our website.

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