Production cuts by members of the Organization of the Petroleum Exporting Countries (OPEC) and other non-OPEC countries are expected to provide a short-term boost to world oil prices, but the effects will be offset to some extent by increases in production in Canada and the United States. The latest price forecast by Deloitte’s Resource Evaluation and Advisory (REA) group also predicts some weakening of natural gas prices after recent rises caused by the onset of cold weather in much of North America but an improvement in the price of propane as a result of increased processing facilities in Alberta.
“Although we expect some slippage in the actual cuts by OPEC and non-OPEC countries, there should still be enough to bring world oil supply below projected demand this year,” says Andrew Botterill, Partner, REA group. “That means prices should recover somewhat in 2017, but there’s nothing we’ve seen to suggest the industry is on the verge of a return to significantly higher prices any time soon.”
Botterill points to the futures market where there is very little increase in the price of oil as global demand growth is expected to remain relatively flat at 1.2 million barrels per day. Deloitte’s long-term forecast for oil prices remains unchanged, at US$75 a barrel for West Texas Intermediate (WTI), while prices should reach US$55 a barrel this year and US$57 in 2018. But there is some optimistic news for Canadian oil producers, as the recent approvals of Enbridge’s Line 3 and Kinder Morgan’s Trans Mountain pipeline projects mean enhanced access to market for Canadian oil. For 2017, however, the report forecasts an expected average price for WCS of $53 per barrel and $54 in 2018, while prices for Edmonton Light are expected to be $69 this year and $70 in 2018.
Natural gas prices, which rose significantly in December as cold temperatures set in, are expected to slip back somewhat due to storage levels that remain at near all-time highs and continuing strong supplies despite the recent low-price environment. Noting that these factors would be offset somewhat if cold weather persists and electricity production continues to switch from coal to natural gas, Deloitte forecasts natural gas prices of US$3.30/Mcf for Henry Hub and US$3.25/Mcf for AECO in 2017, with those prices expected to stay steady in 2018 before slowly increasing in 2019 and beyond.
The current market conditions have spurred several large acquisitions in 2016, many targeting gas resources in Alberta and light oil in Saskatchewan; with eight transactions greater than $500 million in the second half of 2016, following 10 such deals in the second quarter of the year. Based on the current trends, Deloitte’s REA group says it expects private equity to play a much bigger role in such transactions in the future.
About Deloitte
Deloitte, one of Canada’s leading professional services firms, provides audit, tax, consulting, and financial advisory services. Deloitte LLP, an Ontario limited liability partnership, is the Canadian member firm of Deloitte Touche Tohmatsu Limited. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity.