Varcoe: Extra consolidation, excessive costs forecast to hold 'wholesome' Canadian oilpatch into 2024

With petroleum producers remaining disciplined and spending nicely under their money stream ranges, the Canadian sector must be in a wholesome spot in 2024

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Blockbuster oilpatch takeovers, OPEC manufacturing cuts and expectations of sturdy commodity costs are setting the stage for a busy 2024 for the Canadian oil and pure gasoline sector, at the same time as recessionary considerations develop.

On the annual oil and gasoline forecast breakfast of the CFA Society Calgary, a panel of trade executives, traders and analysts mentioned their outlook for the approaching months, noting world vitality demand continues to rise.

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Costs for West Texas Intermediate (WTI) crude have been extremely unstable in latest weeks, climbing by nearly 20 per cent since mid-June once they have been mired under $70 a barrel. Costs topped $93 a barrel in late September earlier than falling again in latest days, closing Tuesday at $81.02.

With petroleum producers remaining disciplined and spending nicely under their money stream ranges, the Canadian sector must be in a wholesome spot in 2024.

“We’re excited with the place the trade is at. I feel there’s lots of volatility, lots of geopolitical danger, which goes to make issues a little bit bit unsure,” Tamarack Valley Power chief monetary officer Steve Buytels instructed reporters Tuesday after talking on the occasion on the Calgary Petroleum Membership.

“I do imagine we’re going to be vary sure and it’ll be wholesome — $70, $80 oil is wholesome for producers . . . On the finish of the day, I do really feel we’re vary sure in that $70 to kind of $100 WTI atmosphere.”

Oil costs have been buoyant this yr as demand has elevated, whereas OPEC+ international locations have throttled again manufacturing. Nonetheless, markets have come off the highs seen final yr following Russia’s invasion of Ukraine, when WTI crude briefly topped $120 a barrel.

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In September, Saudi Arabia agreed to increase its voluntary manufacturing cuts of 1 million barrels per day till the top of this yr.

The Worldwide Power Company says demand progress in China, India and Brazil has helped world consumption rise by 2.3 million barrels per day (bpd) this yr, reaching nearly 102 million bpd in September.

Nonetheless, progress is anticipated to sluggish to 900,000 bpd subsequent yr “because the post-COVID rebound runs out of steam, whereas the financial growth slows,” the company stated in its newest oil market report.

There are considerations a decelerating world economic system may start to crimp vitality demand, whereas recessionary fears persist.

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In Canada, gross home product was unchanged in August. On Tuesday, Statistics Canada reported that its advance estimates counsel GDP within the third quarter was primarily flat.

The Worldwide Financial Fund just lately decreased its outlook for world financial progress in 2024; superior economies are forecast to broaden by 1.4 per cent as larger rates of interest begin to chew.

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A brand new report by TD Economics examined the impact of upper oil costs on the highly effective U.S. economic system, concluding the drag on its financial progress in 2023 is projected to be fairly small.

But, “an additional escalation in geopolitical tensions stands to not solely push oil costs larger, but in addition result in larger and extra persistent inflationary pressures,” it cautioned.

Some forecasters have instructed oil costs may bounce again above $100 a barrel within the coming months amid battle within the Center East, rising vitality consumption and tight stock ranges.

“OPEC is in management,” Rafi Tahmazian, senior portfolio supervisor at Canoe Monetary, stated on the breakfast occasion.

“I don’t suppose they’re going to flood the market to deliver the value down . . . I’d enterprise to say we’re going to be nearer to $100.”

OPEC
FILE PHOTO: The emblem of the Group of the Petroleoum Exporting International locations (OPEC) is seen outdoors of OPEC’s headquarters in Vienna, Austria, on March 3, 2022. Picture by Lisa Leutner /The Related Press

Whereas oil costs have been sturdy, pure gasoline costs have been subdued all through most of 2023.

Nonetheless, the completion of the Coastal GasLink pipeline — it would ship gasoline to the LNG Canada undertaking, as soon as it begins working in 2025 — has spurred expectation costs will enhance by this time subsequent yr.

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The LNG progress increase in North America “is a big a part of the gasoline story,” Jamie Heard, supervisor of capital markets at Tourmaline Oil, stated through the panel.

By the top of the last decade, LNG exports from North America will develop from about 12 billion cubic toes (bcf) of gasoline per day to about 30 bcf a day, he famous.

“Costs are going to should rise to steadiness the system,” stated Heard.

LNG Canada site at Kitimat
Development continues on the LNG Canada web site at Kitimat, B.C., in June 2023. LNG Canada picture

In the meantime, the oil and gasoline trade goes via one other aggressive consolidation part.

On a world scale, supermajor ExxonMobil struck a deal just lately to purchase U.S. impartial Pioneer Pure Sources for US$59.5 billion, adopted by Chevron snapping up Hess for US$53 billion.

Offers involving the supermajors present that these producers are transferring to safe top-tier sources, “betting for six to 10 years that you simply’ve acquired a cycle right here that’s going to be supported by some fairly respectable oil worth,” Buytels stated.

And the wave of mergers and acquisitions isn’t anticipated to cease.

“You take a look at the M&A that’s occurring — it’s the massive mega-caps mainly telling you, we want extra useful resource, there may be going to be a shortage of provide sooner or later,” he added.

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Equally, Raymond James analyst Jeremy McCrea anticipates loads of transactions in 2024 as Canadian petroleum producers search to broaden, hoping to draw a bigger base of traders and decrease their value of capital.

McCrea, who moderated Tuesday’s dialogue, believes Canadian oilpatch capital expenditures will enhance by about 10 per cent subsequent yr as firms earmark extra money so as to add manufacturing — modestly — if commodity costs stay wholesome.

“What they’re in search of is long-term sustainable costs,” he stated in an interview.

“Corporations will proceed to purchase again their inventory, however there’s nonetheless lots of extra free money stream that I feel they’ll begin to put towards some progress.”

Chris Varcoe is a Calgary Herald columnist.

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