Oil price prospects giving producers little to cheer about
Even the world’s largest petroleum importer thinks oil prices have fallen too low. This week, China set a US$40 per barrel price floor for domestic fuels to protect local producers and curtail the use of cheap fuel.
Inconsolable oil investors wish they, too, could conjure up a bottom on oil prices, which have fallen 20 per cent in the first two weeks of the year, to add to the 45 per cent decline of last year. U.S. crude skidded nearly six per cent Friday, below US$30 per barrel — US$29.42 — for the first time in 12 years, as the market fretted over the prospect of new supplies from Iran.
“Traders could take it down to US$25 per barrel in the next several months,” warned Patricia Mohr, vice-president, economic and commodity market specialist at Scotiabank. “It really doesn’t have much to do with cost of production, and it’s not sustainable for years and years.”
Over the weekend, the United Nations atomic watchdog is expected to announce Iran’s compliance with the nuclear disarmament deal it struck with global powers last year, which will clear the way to lifting sanctions on the country. Iran claims it can raise production by 500,000 barrels per day quickly once sanctions are lifted.
The prospect of fresh supplies has sent share prices of oil and gas companies tumbling, with the S&P/TSX Capped Energy Index down 4.50 per cent Friday.
“You don’t have return expectations anymore right now at current levels and, definitely with regards to the Canadian guys, it is very hard to find anybody who is making money right now,” said Samir Kayande, a director at Calgarybased RS Energy Group.
Investment dealer Peters & Co. expects a US$21 billion funding shortfall for Canadian producers in 2016, and oil output to slide five per cent, if the current price environment persists.
Even before this year’s plunge, investors were bracing for a “white knuckle ride” when the Canadian oilpatch kicks off fourth-quarter earnings season later this month, says CIBC Capital Markets.
CIBC expects the industry’s cash flow per share — a key metric in times of liquidity concerns — to decline by 15 per cent overall, and fall 27 per cent for integrated companies, in the fourth quarter compared to the previous quarter.
Some Canadian producers are shielded from the evaporating value of the loonie as oil prices are denominated in U.S. dollars, but the currency impact is muted.
“It’s more helpful for light oil and natural gas producers.
“But for heavy oil guys, unfortunately, the biggest cost is in the discount that their products receive relative to WTI,” Kayande said. The Canadian heavy benchmark Western Canada Select was trading at a US$14.60 differential to the West Texas Intermediate on Thursday.
Paradoxically, the strong U.S. dollar has helped some oil-producing countries to maintain production, argues Mohr.
The small consolation of a cheaper currency is not enough to lift the producers’ mood. But amid the gloom, there are signs that global supplies are declining. The U.S. Department of Energy expects U.S. oil production to shrink by about 700,000 bpd to 8.5 million bpd by November 2016.
“The market will react very positively to U.S. production decline, and if you see a bigger move down in actual oil production, you can have prices lift US$10 quite quickly,” Mohr said.
The dramatic declines may even be laying the ground for a recovery, according to Goldman Sachs analyst Jeff Currie, who predicted last year that oil could touch US$20 per barrel.
“The key theme for 2016 will be real fundamental adjustments that can rebalance markets to create the birth of a new bull market, which we still see happening in late 2016,” Currie and colleague Damien Courvalin said in a note to clients.
Oil bull Emad Mostaque, who had predicted the oil price decline in 2014, is reiterating his call for triple-digit oil prices.
“Despite the recent crash I remain optimistic for a recovery into next year and my oil price target remains US$100+ by the end of 2017 unless production costs really have dropped by 70 per cent across the board,” said Mostaque, now an analyst at London-based research consultancy Ecstrat.