Province is facing tough times in slump

But Alberta’s resilient producers have faced worse in the past, writes

Are we there yet? Nope. After plunging by $49 US a barrel since June, this year’s dramatic meltdown in oil prices isn’t over. Watch for the price of West Texas Intermediate (WTI), the benchmark grade of U.S. light crude, to hit $50 US a barrel (or lower) before a sustained turnaround begins in the last half of 2015.

That’s right folks. The odds say Alberta’s major industry — and a vital source of provincial revenues — faces several more months of choppy seas ahead before it crawls back on to dry land.

No wonder Alberta Premier Jim Prentice sees a big hole — amounting to $6 billion (Cdn) or more — in the province’s projected revenues next year. Can anyone spell budget cuts?

Of course, no one knows where the exact bottom will be. The best guesses for WTI range from as low as $30 a barrel (according to Calgary oil baron Murray Edwards) to $43 (Morgan Stanley) to about $50 (Bank of America, Eurasia Group).

No one knows precisely when it will occur either. Investment bank Goldman Sachs is betting on a bottom by the second quarter of 2015.

Eurasia, a major global energy consulting firm, expects the lows to hit in the first quarter, assuming the Organization of Petroleum Exporting Countries (OPEC) finally acts to curb output and U.S. shale producers cut back.

Whatever happens, the price is sure to be somewhere south of Friday’s close of $57.81, which marked the lowest level in five years.

Since June, WTI prices are off by 45 per cent. Brent crude, the key international grade, has sunk about 46 per cent, to less than $62 a barrel.

With OPEC heavyweight Saudi Arabia vowing not to curb output despite howls of protest from Venezuela and Iran, and U.S. production still running at record levels of nine million barrels a day even as global demand growth slows, the stage is set for a nasty shakeout.

As it stands, roughly 1.5 million barrels of surplus production is sloshing around a global oil market that consumes roughly 93 million barrels of crude per day, and no one is willing to give up a piece of it.

OPEC’s members, who are producing more than 30 million barrels of crude a day now and expect demand for their output to fall below 29 million barrels a day in 2015, hope to increase market share at the expense of other players.

Put simply, this is a colossal fight over who gets what share of the energy pie, and so far, no one is blinking, even as share prices and currencies tank, sending shivers through global equity markets.

Here in Canada, the rout in energy stocks has been a key factor behind the decline in the loonie and the sharp pullback on the Toronto Stock Exchange, where the benchmark index now sits at 13,731.05.

That’s a full 12.5 per cent below its 2014 high, and just a hair above where it started the year. Even Canada’s usually rock-solid bank stocks are taking a hit, as worries about credit losses rise.

Unless oil prices rebound soon, some high-cost small or mid-tier producers with heavy debt loads won’t survive. Although some of Alberta’s oilsands players have high-cost operations, others are still generating a profit, even at current prices.

Most are big enough to survive a few weak quarters, in any case. And they aren’t the only ones feeling the heat.

Some U.S. shale oil plays also sit at the high end of the cost curve, says Scotiabank commodity guru Patricia Mohr.

That includes some producers in North Dakota’s prolific Bakken play and the Permian Basin of West Texas.

Internationally, the ground is shifting too. Oil-rich Venezuela is in crisis, and may be forced to default on its debt.

Russia’s energy-fuelled economy, already groaning under the weight of international sanctions due to Vladimir Putin’s adventures in eastern Ukraine, has been pushed into recession.

Cash-strapped countries like Nigeria may face increased social upheaval, and all but two of OPEC’s member states (Kuwait and Qatar) will face burdensome deficits at current low oil prices.

If not for its massive cash reserves, even OPEC kingpin Saudi Arabia would likely have cried uncle by now, and caved into pressure by cutting output.

But it hasn’t, Instead, it and other OPEC players have continued to discount prices in Asia, the only global growth market that’s left for crude oil. The winners? Big oil importers like China and India.

So here’s the deal. The great Alberta oil boom of recent years has hit the pause button, and the pause is likely to last a while. Although most economists and forecasters expect crude prices to rebound to $75 US or more in the second half of 2015, virtually no one sees a return to $100 oil in the foreseeable future.

That said, there’s no reason to panic. Alberta will survive this, and so will Western Canada’s oilpatch. Most Albertans have been through this before, and will adapt to the latest carnage.

The sharp drop in the loonie and lower discounts on Western Canada Select (WCS), Alberta’s benchmark grade — which now sells for about $47 Cdn a barrel — have provided a bit of insulation.

Meanwhile, other sectors of the provincial economy, from retailing to forestry to financial services and agriculture, are doing well, and that’s likely to continue. According to the latest economic forecast from RBC Economics, the provincial economy will grow by 2.7 per cent next year. Not great by Alberta’s typically superior standards, perhaps, but right in line with the rest of the country.

The bottom line? This is a tough, resilient, resourceful province that has survived far worse. For those who don’t remember, oil sold for just $33 a barrel in early 2009, and in 1998, prices got down to just $8 a barrel. So it’s not as if producers haven’t endured tough times before. They have, and they’ll endure this rough patch too.