Price plunge
As oil dives, Alberta producers may be first to feel the pinch.
OTTAWA/CALGARY • The recent plunge in oil prices could signal a major slowdown in global demand as overall growth weakens — but the impact on Canada’s economy is unlikely to be significant.
The price of crude has dropped about 20% in just a few months, initially blamed on excess supply along with ebbing economic growth in China and Europe’s slide back into a recession.
Now, there are concerns over a possible pricing war —led by Saudi Arabia, the largest producer in the Organization of Petroleum Exporting Countries — that is aimed at curbing production of competing energy sources, such as U.S. shale oil, which would cut into profits and limit expansion.
At the same time, U.S. crude oil producers could also lower their production levels and shut down rigs in response to lower OPEC prices.
“OPEC appears to be gearing up for a price war,” Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt, said in a report, adding that prices will not stabilize “until this impression disappears and OPEC returns to co-ordinated production cuts.”
The price of West Texas Crude, the U.S. benchmark, closed at US$91.01 on Thursday, up US28¢ on the day. But oil hit an intraday level of US$88.18, the lowest since April 23, 2013.
Jayson Myers, president and CEO of Canadian Manufacturers & Exporters, said he doubts there has been “a fundamental shift in the internal dynamics of the oil industry.”
As for any impact of weaker oil prices on the Canadian economy, Mr. Myers said: “I don’t think so.”
Nevertheless, Canadian oil producers have been operating in a challenging price environment for a few years, said Greg Stringham, vice-president of oil sands and markets at the Canadian Association of Petroleum Producers.
The international Brent benchmark price has fallen from about US$112 in June to US$93.75 on Thursday, while the West Texas Intermediate (WTI) spot price has gone from US$104 to US$91.40 over the same period. Meanwhile, Mr. Stringham said, Western Canadian Select (WCS) has traded in the $85 range throughout that time period.
Still, the price differential between WCS and WTI — which has hurt Canadian oil companies’ cash flows during the past two years — has narrowed, Mr. Stringham said.
Data from FirstEnergy Capital Corp. showed the gap between the two North American indices was $14.75 on Wednesday, compared with $32.55 a year before.
Randall Bartlett, senior economist at TD Economics, said he sees oil “trending lower.”
“But, at the same time, we’re still expecting it to stay rela- tively elevated compared to, maybe not recent history, but the longer history,” he said.
Mr. Bartlett forecasts oil to stay around the US$85-US$90 range. “We don’t foresee any significant shocks on the horizon at all,” he said.
Matt Parry, senior oil market analyst at the International Energy Agency, said the growth in global oil supply during the next five years is expected to outpace the growth in oil demand.
As a result, Mr. Parry said, “that suggest oil prices have another US$10 to fall over the next five years or so.”
A drop in the price of oil will have an effect on oil producers drilling decisions, potentially as early as next year.
“The U.S. supply adjustment can happen at a much faster pace,” Mr. Parry said. “We haven’t seen any evidence of that yet because the price hasn’t fallen enough.”
In Canada, proposed oil sands projects are most at risk of being delayed should the current drop in world oil prices persist over the longer term.
Dinara Millington, vicepresident of research at the Canadian Energy Research Institute, said the WTI oil price necessary for a new oil sands mine with upgrading capacity to earn a return in Alberta is US$100 per barrel.
The oil price for a steamassisted gravity drainage oil sands project to earn a return on investment is US$75, Ms. Millington said.
“What this means is that prices need to be at a level of US$75 or higher to make a return on [oil sands producers’] capital projects,” she said.