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Oil prices expected to decline in second half of 2018

Increased OPEC production and reduced demand likely to ease current high crude values

CALGARY, ALBERTA (July 4, 2018) – Global oil prices are expected to recede in the coming months after reaching their highest values since 2014 as OPEC countries increase output and international demand for oil declines in the second half of the year, according to the latest forecast from Deloitte’s Resource Evaluation and Advisory (REA) group. Lower exportable crude oil volumes from the United States, where record production levels have been offset by higher domestic demand, widened the price differential between WTI and Brent to an average of US$7.00 a barrel in May, while Canadian WCS differentials to WTI narrowed to US$16.74, down approximately 30 per cent from the first quarter of the year.

“Some of the transportation bottlenecks for the Western Canadian Sedimentary Basin eased in the second quarter thanks to increased rail shipments of crude oil, something we expect to see continue for the rest of the year,” says Andrew Botterill, Partner, Deloitte. “In addition, demand from U.S. Gulf Coast refineries for Canadian heavy crude should increase as they look to replace supplies previously obtained from Venezuela, where production volumes continue to decline.”

Canadian natural gas prices have remained volatile and are expected to fluctuate for the remainder of the year. AECO prices have ranged from C$2.12/Mcf in January to C$1.20/Mcf in May, prompting many producers to turn to other markets to mitigate these low prices and minimize their exposure to AECO price volatility. Low financial returns from current prices have also led several Canadian producers to defer or reduce their development capital spending this year while others have shut-in production of non-core operations.

Henry Hub prices have remained stable through 2018, averaging approximately US$3.00/Mcf in the first and second quarters of the year. Deloitte notes the U.S. natural gas market appears to be strengthening, with production volumes continuing to rise mainly due to shale gas production and associated gas from the Permian Basin, and increased access to international markets. LNG exports to Asian countries now make up approximately 17 per cent of all U.S. natural gas exports, up 12 per cent from last year, while pipeline exports to Mexico account for a large portion of the rest.

“Canadian producers are likely to revert to AECO markets once prices increase and transportation costs to East Coast markets are no longer offset by higher prices currently available there,” says Botterill. “Meanwhile, U.S. producers may face some domestic transportation issues in the second half of the year as increased production strains existing pipeline capacities and scheduled summer maintenance takes place.”

For Deloitte’s complete oil and gas price forecast dated June 30, 2018, visit our website.

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