By SHAWN MCCARTHY
Monday, January 8, 2018
OTTAWA -- Global crude markets carried their end-of-year momentum into 2018, but will have trouble taking prices higher in the coming weeks barring a major geopolitical event, analysts say.
Leading international and North American benchmark prices hit their highest levels in nearly two years near the end of last week, before a profit-taking sell-off on Friday. Analysts expect prices to ease back below $60 (U.S.) for West Texas intermediate (WTI), as American shale-oil producers take advantage of the runup over the past month to increase production at locked-in prices.
"We are cautious at current price levels given that the major theme this year is going to be a [growing] U.S. producer versus a fundamental oil backdrop that looks quite constructive," Michael Tran, energy strategist at Royal Bank of Canada in New York, said in an interview.
"Oil prices have reached the selfdeclared sweet spot for U.S. producers," Mr. Tran said. While there is some uncertainty over how much U.S. companies can boost output, many are hedging a significant portion of their future production at today's prices, he said.
"What we've seen over the past few months is that U.S. production has ramped up significantly.
We do continue to think that will be a fairly decent-sized threat to this market over the next several months."
West Texas intermediate hit $62.21 a barrel on Thursday, its highest since May, 2015, before yielding ground Friday to finish the week at $61.48. A month ago, WTI traded at $56 a barrel. Brent crude touched $68.27 a barrel on Thursday - also the highest since May, 2015 - before falling 41 cents on Friday.
The market has been fuelled by several factors: an extension of the deal between OPEC and major non-OPEC producers to extend their production cut beyond March; major production outages in the North Sea and Libya, and an overall sign that inventories are being drawn down and the market restored to balance.
As well, financial traders have invested heavily in crude-oil futures, but there is little expectation of new buyers in the market that would push prices materially higher, Mr. Tran said.
The strengthening global market has sparked some increased optimism among Calgary-based producers, although Western Canadian prices have seen a widening discount as growing oil sands production is causing pipeline bottlenecks.
"People are kind of excited to see things maybe a little better and there's more optimism in the sector right now," said Andrew Botterill, a Calgary-based partner with Deloitte.
Mr. Botterill - who advises companies on asset valuations - released a report last week that forecasts WTI will average $55 a barrel this year, compared with $50.84 last year and $43.79 in 2016. Western Canada Select (WCS) traded Friday at a $24.90 (U.S.) discount below WTI.
As a result of that wider differential, Deloitte forecasts the price for WCS in Canadian dollars will average less this year than it did in 2017, at $46.40 (Canadian) a barrel versus $50.85.
Nonetheless, the consultant said Western Canadian producers are heartened by the strength in global markets.
"We have seen prices go up overall during the year, and producers are looking at where we're sitting now at the start of 2018 as a so-much-stronger position than we were in 2017," he said. "They feel there is less downside risk."
Deloitte expects the gaping differential between U.S. prices and Canadian ones to shrink over the course of the year as producers find ways to move volumes into markets.
However, companies that largely produce natural gas are facing a tough year ahead. Western Canadian gas prices have been at rock-bottom levels through the latter half of 2017, with AECO contracts trading recently around $1.60 per thousand cubic feet (mcf).
Deloitte forecasts an AECO price of $2 per mcf this year.
In contrast, American gas prices are trading around $2.50 (U.S.).
"The big story right now is how very troubled Canadian natural-gas pricing has been," Mr. Botterill said.
"There is great stress on natural-gas producers."