ATB Financial expects West Texas Intermediate (WTI) crude to recover to $50-$55 per barrel (bbl) by year’s end or early 2017, while the Conference Board of Canada expects $40 a bbl exiting 2016.
All prices are in U.S. dollars and for WTI.
Both forecasts were laid out at the Conference Board’s Western Canadian outlook seminar in Calgary March 3. Presentations focused mostly on the broad economy. They discussed oil prices, but not natural gas. The AECO gas spot price fell below $1.30 a gigajoule this week.
“What we’re predicting is $40 WTI for the end of the year, [and] by 2018, around $50,” said Conference Board president Dan Muzyka.
However, Muzyka cautioned this depends on many factors, including whether Saudi Arabia will cut production, how much Iranian output will ramp up now that trade sanctions have been lifted, and output from Iraq, a major source of production growth.
“We need to take one or two million barrels a day out of the system,” he said.
Also, U.S. output has remained resilient and Canadian production continues to rise as oilsands projects already under construction are completed.
“There’s also a question mark around what is the marginal cost of [U.S.] shale production. We’ve seen some reports that may be around $30 a barrel,” said Muzyka.
In summary, he predicts the price will slowly recover: “We believe that the Saudis have a limit of how much of their own cash reserves they want to use to support their economy. And the wild cards in here are countries like Iran, Iraq. What happens with this capacity?”
The Conference Board expects WTI to average $37 a bbl in 2016, exit the year at about $40, and average $45 in 2017, said Pedro Antunes, the economic forecasting group’s deputy chief economist.
“Given the last couple of ticks up, I think it’s a reasonable forecast, and perhaps we may see a little upside risk to that [forecast],” Antunes said.
“You could certainly build scenarios where oil prices get up above what we have in our baseline forecasts. But I think the fundamentals do not look very, very positive in terms of driving up oil prices well beyond what we have over the medium term,” he said.
Three scenarios
Todd Hirsch, chief economist at Alberta government-owned ATB Financial, outlined three scenarios, but believes the most likely is $50-$55 a bbl by year’s end or early 2017.
First, Hirsch rhetorically asked what the odds are that the price will climb back to $80 a bbl by year’s end. “I’m putting the odds of that at about 75 to one. In other words, not very likely at all, and certainly nothing anyone should be banking on or putting a lot of bets on.”
But he added: “It’s not an impossibility either. ... If the last couple of years in Alberta have taught us anything as economists, you can’t discount or exclude any event from happening.”
If OPEC cut production within the next couple of months and non-OPEC countries such as Canada, the U.S., Russia and Brazil followed suit, prices could return to $80, or even higher, exiting 2016, he said.
“And on the demand side, we would also need to see a strong revival in those BRIC [Brazil, Russia, India, China] economies,” Hirsch said. But the BRIC is now just down to just the “IC”— India and China — because Brazil and Russia “have been huge disappointments economically.”
He explained: “So it really is down to India and China and some other emerging global markets. We would need to see a strong rebound in energy demand from those and the rest of the global economy as well. All of those events could sort of come together in 2016, but I don’t think they [will]. And that is why I’m putting the odds of this at 75:1.”
Hirsch also assessed the chances of $20 WTI a year from now. “I’m not talking about oil kind of faltering and hitting $20 a barrel before it rebounds. I’m talking about it going to $10 or $15 a barrel and essentially flat-lining for the rest of the year and not recovering beyond $20 a barrel at the end of the year.
“I’m putting the odds of that at 20 to one: also not very likely to happen. But you might note that the odds of this are much greater than the odds of oil at $80 a barrel. And increasingly, I don’t think this is something that we need to spend a lot of time fretting in Alberta, but I do think it’s something we need to keep in mind. It lurks out there as a possibility.”
For the $20 scenario to happen, he said a series of events would need to fall into place: OPEC would have to remain unrelenting in pushing oil onto the market, as would non-OPEC producers. “And we would need to see far worse results economically from [India and China] and the rest of the global economy.”
In 1999 oil fell to $10 a bbl and in 2008 it soared to almost $150. “I don’t think either of those is very probable,” Hirsch said of the near term.
“But the most likely scenario, I’m suggesting, would be oil back around $50 or $55 a barrel. I’m putting the odds against that at three to one ... that we will see oil recover modestly to that range by the end of the year or early into 2017.”
Hirsch doesn’t expect much price recovery in the first half of 2016. As for the recent bounce above $34 a barrel, he said given oil’s current volatility, it wouldn’t be surprising to see WTI sink back to the high $20s in the first half of this year.
“I don’t see much chance for lasting recovery in the first half of 2016, but I do see it in the second half of 2016. And that is because I actually don’t think OPEC will be able to keep producing at current volumes. ... Saudi Arabia is not going to be the least bit happy about this. But ... I don’t think the other 11 OPEC countries are going to be able to continue ploughing oil on the market at these price levels.”
He said the other OPEC countries — particularly Venezuela and Nigeria — are higher-cost producers who, to varying degrees, are bending under the strain of $33 oil.
Hirsch described Venezuela as “on the absolute razor’s edge of social and political collapse. And when that happens, it gets very difficult for even the infrastructure around their energy sector to operate. And when that happens, it gets difficult for Venezuela to produce and export oil.”
He added: “We think we’ve got it bad here in Alberta. And in a lot of ways we do. ... But it’s a shadow of the misery of what some of these OPEC countries are going through. And that’s why I don’t think OPEC is going to be able to continue this game of chicken with energy production and energy prices indefinitely.”
The ATB economist doesn’t think it will take much OPEC production curtailment to boost prices above $50. But he cautioned: “This also depends on global demand hanging in there. In other words, we’re not looking at another global recession, we’re not looking at a Chinese market collapse — although that lurks out there too as a possibility.”
In a world where prices have been teetering just above $30 a bbl, $50-$55 would seem like an Alberta recovery, but Hirsch begs to differ.
“The problem is that’s still a really low price for this province. And it still is going to be an enormous drain — not only on producers in this province, but also the provincial government. ... Most producers in this province are still going to be really strapped to produce at $50 or $55.”
For investment to rebound, he believes Alberta needs about $70 WTI.
“So I think $50 or $55 oil would kind of stabilize the industry. But we’re really not looking at a growth scenario coming back until we get those prices back into that $60 or $70 level.”
