Alberta will adopt a conservative stance for natural resource revenue projections when it tables its budget Thursday, despite higher oil prices than a year ago and forecasts that predict a sector recovery over the next 12 months.
Alberta’s balance sheet has been decimated by the pandemic, after a precipitous drop in demand for crude compounded by a Russia-Saudi Arabia price war last year that hammered prices. In its mid-year fiscal update in November, the province predicted a $21-billion deficit, largely because of the hit to natural resource revenues.
Oil prices have ticked up in recent weeks as countries begin rolling out COVID-19 vaccinations, but Alberta Premier Jason Kenney says his government won’t be counting on that to dig its way out of its fiscal hole.
“Alberta governments of different stripes have often been criticized for trying to project their way out of deficit. We will not be making that mistake. We will be very cautious on projecting revenues,” he told media this week.
“We have seen some projections of strong energy prices in the latter half of this year – and gosh knows, I hope that is true. But it would be irresponsible to plan for that. So you will see quite conservative projections for commodity prices in Thursday’s budget.”
Despite the uncertainty around the timing and extent of a global economic recovery, analysts are optimistic about oil prices and a sector recovery.
A research note from Bank of Nova Scotia this week pointed to increased cash flows in the sector. Between that, improved refining margins, rising stocks and sector balance sheets on the mend, ”now is the time to own [Canadian] oil names,” it said.
Ratings agency DBRS Morningstar also forecasts a recovery for the oil sector over the coming months.
In a report this week, it noted oil prices are back to prepandemic levels “and are actually above levels at the same point last year when WTI and Brent oil prices were USD 52/bbl and USD 58/bbl, respectively.” DBRS Morningstar added that the price for Western Canadian Select heavy oil has risen sharply; the benchmark WCS price, currently close to US$50 a barrel, is about 43 per cent higher than at this time a year ago.
Victor Vallance, DBRS Morningstar’s senior vice-president of natural resources and pipelines, told The Globe and Mail the recovery in demand is well under way, bolstered in part by the rollout of vaccines. He expects it will continue, with the sector returning to “a more normalized level of economic activity by later this year, or some time early next year.”
While the oil price recovery has been “a lot faster” than Mr. Vallance expected, it’s not in the clear. Along with the unknowns around variants, there’s also the question of co-operation among members of the Organization of the Petroleum Exporting Countries alliance, or “OPEC Plus,” a 23-country coalition that includes Russia.
OPEC Plus has been “amazingly resilient in undertaking significant production cuts to bring back balance in the market,” he said, but whether that will continue hinges on nations remaining in agreement about production allocations during its next meeting, slated for March 4 via video conference.
“I would say that’s the biggest risk – that you see disunity within the OPEC alliance,” he said.
“Then you might start to see members of that alliance start producing at will and then you get a flood of oil in the market. The market just can’t absorb that.”
Alberta’s deficit was predicted to be $6.8-billion when Finance Minister Travis Toews introduced the budget last February, saying at the time 2020 had the potential to be “a turnaround year” for the province’s economy.
But a global recession, the COVID-19 pandemic and an energy price war saw the forecast deficit soar to $21-billion in November.
The pandemic hit to oil prices lopped billions of dollars off provincial revenues, which dropped by around a quarter over the 2020-21 fiscal year ending March 31. For the first half of the fiscal year, Alberta was looking at “virtually zero royalty revenue,” Mr. Kenney said.
While that has abated in recent months thanks to recovering energy prices, “we have still lost several billion dollars in revenues that we were banking on,” he said.
Mr. Kenney said oil prices in Thursday’s budget will be slightly below the private-sector forecast average. By way of example, DBRS Morningstar forecasts a WTI price of US$53 a barrel for 2021 and US$52/bbl for 2022, 2023 and beyond.
With a report from The Canadian Press
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