‘Strong demand, OPEC cuts will boost oil prices’

Crude oil prices are expected to continue to rise in early 2018 as global oil demand remains strong and members of the Organisation of Petroleum Exporting Countries (OPEC) look set to extend their current production cuts throughout the year.

The latest report by Deloitte’s Resource Evaluation and Advisory (REA) group noted, however, that concerns over transportation bottlenecks to the United States (US) market have increased the historic price differential between Western Canadian Select (WCS) and West Texas Intermediate (WTI) oil.

Infrastructure issues in Canada have also created extreme volatility in natural gas prices between AECO and Henry Hub, with similar volatility predicted as more maintenance projects are planned for the summer of 2018.

“Canadian oil prices lagged behind those in the United States during 2017 largely due to increased US production and possible transportation difficulties getting Canadian oil into that market,” said Andrew Botterill, Deloitte’s National Oil & Gas Leader and Partner, REA group.

“But if Canada can take advantage of declining Venezuelan and Mexican exports to the US and access some of its heavy oil refining capacity, the price differential between WCS and WTI should at least be moderate compared to the historical differential.”

Botterill said the US is increasing its light oil production after rig counts rose throughout 2017. More importantly, the US is boosting its oil exports to large consumer markets such as Asia, which now accounts for one-third of its crude oil export volumes.

Meanwhile, import volumes in the U.S. during 2017 remained similar to those during the previous year, giving Canadian producers an opportunity to pick up some of the market previously supplied by Mexico and Venezuela. Taking into account increased crude oil prices over the final two quarters of 2017 and the increased heavy oil price differential, Botterill said Deloitte is forecasting a price of US$55 per barrel for WTI in 2018 and C$46.40 per barrel for WCS.

Canadian natural gas prices, which fluctuated considerably in 2017, recovered somewhat in the final quarter of the year as transportation systems resumed operating at full capacity after several maintenance projects during the year. Botterill said more price fluctuations could occur in the summer of 2018 when new maintenance projects are expected to take place. He notes that, while increased natural gas production has allowed the U.S. to grow its gas export market by 31 per cent in 2017, Canada’s limited ability to access new markets has resulted in low AECO pricing. As a result, the Deloitte forecast is for AECO to be C$2/million cubic feet (Mcf) in 2018 while Henry Hub is forecast to be US$2.80/Mcf.

The latest REA forecast also identifies several trends to watch in 2018, including drilling and completion costs expected to rise in 2018 as competition for rigs increases; uncertainty about AECO pricing in a volatile environment could hinder development plans of Canadian dry gas producers, light oil development should continue as a consistent pace, particularly in Saskatchewan and southeast Alberta; while total bitumen production may for the first time exceed three million barrels per day and producers will continue to target liquid-rich gas plays in the Deep Basin.

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