In the biggest news the oil market has seen in a while, OPEC just announced their agreement to cut the group’s crude oil output to 32.5 to 33 million barrels per day. Some are arguing about the specific terminology, saying it’s really only an “agreement to agree” or “an understanding that an agreement needs to be reached” and that the details remain to be seen. Nonetheless, OPEC’s most powerful member, Saudi Arabia, has offered to reduce its production, which is a sign they may be willing to adjust their strategy. This is, without a doubt, welcome news to the industry, even if there remains disagreement about the degree to which crude prices will truly be affected.
2016’s third quarter experienced limited volatility in crude oil prices, with Brent and WTI spending most of their time in the 45 to 50 USD/bbl range. Some are saying that with OPEC’s deal, this may represent a new floor on oil prices, though most remain skeptical that a hard floor is truly possible in the global market. While US crude output is down nearly one million barrels per day since peaking in April 2015, Russian crude production is at record post-Soviet-era levels, and OPEC production, even with the suggested cut, is three million barrels per day higher than in 2014. The expectation now is that OPEC will pursue further agreements with “OPEC plus” countries, like Russia, which has expressed interest in the past.
Markets may still respond further as they digest the deal. Global crude demand is still healthy and growing at an estimated 1.1 million barrels per day, per year. While some forecasters are a little more bearish, the IEA currently expects a supply-demand balance to be reached by late 2017, which could have a significant impact on market sentiment, even if widely expected. Looking out a year, futures and options prices imply a 95% confidence level for December 2017 WTI crude prices of 25 USD/bbl to 105 USD/bbl.
Our crude oil price forecasts are little changed from last quarter, with only minor tweaks and maintaining a long term 75 USD/bbl forecast price for Brent and 72 USD/bbl for WTI (both in real 2016 dollars).
Similar to crude, the US Dollar has traded in a relatively narrow range against a basket of currencies since the beginning of summer. The Loonie has spent the entire quarter in a fairly tight range, with the US Dollar priced between 0.75 to 0.78 per CAD. This is primarily due to an absence of any unexpected news on interest rates as well as, probably most of all, the tight crude oil trading range. We expect the Loonie to slowly appreciate alongside crude oil over the next few years to 0.85 USD per CAD.
Canadian crudes have been priced at historically normal differentials to the WTI benchmark, with light, sweet crude at Edmonton discounted between 1.50 and 4.00 USD/bbl and heavy WCS crude at Hardisty discounted between 12 and 15 USD/bbl.
North American natural gas prices had a relatively calm but strong third quarter, finishing slightly higher again following their very strong second quarter. Henry Hub near month contracts are right around the 3.00 USD/MMBtu mark. Natural gas in Alberta, still experiencing a steep discount to the Henry Hub benchmark, is nonetheless higher than it’s been in nearly a year, with AECO spot prices around 2.90 CAD/MMBtu. AECO has had a very volatile year (see chart) but now is currently in a state where spot and forward prices for the next few years are occupying a very narrow range between 2.60 and 3.00 CAD/MMBtu. Gas sold into the Spectra system at the Station 2 location near Chetwynd, British Columbia, is currently 0.35 CAD/MMBtu below AECO, at about 2.55 CAD/MMBtu.
The Canadian natural gas industry received positive news when the Canadian federal government conditionally approved the Pacific NorthWest LNG project, but it remains to be seen whether the project will, in fact, go ahead. LNG export economics to Asia are not nearly as rosy as they were a few years ago, and global competition is arguably a step ahead of Canada in meeting their needs. If the project does proceed, it’s uncertain whether it will actually move Canadian gas prices or if it will just allow additional volumes to be brought on-stream with prices remaining status quo.
In Europe, natural gas prices are about flat since last quarter, with UK (NBP) gas trading lower for most of the quarter, but currently hovering around 5.25 USD/MMBtu. Japanese LNG prices were around 6.00 USD/MMBtu in August, highlighting the relative economic difficulty of a Canadian LNG export project compared to 2014, when prices reached the 15 to 20 USD/MMBtu range.
Our natural gas forecasts are also little changed from last quarter, with Henry Hub expected to be in the 3.00 to 3.50 USD/MMBtu range for the next few years, increasing to 3.75 USD/MMBtu (in real 2016 dollars) in the longer term. Our expectation for NBP (UK) gas prices is down slightly relative to our July forecast, with prices expected to occupy the 5.50 USD/MMBtu (near term) to 7.50 USD/MMBtu (longer term) range.
Tyler Schlosser is GLJ Petroleum’s Director of Commodities Research, focusing on economic modeling, risk analysis, commodity pricing and business development. Tyler is responsible for generating GLJ’s commodity price forecasts and modeling fiscal regimes across a broad range of international jurisdictions.