World crude markets are hitting a "bumpy bottom" as the hindrance of oil oversupply slowly eases, with prices likely to gradually rebound in the years ahead, according to Calgary's FirstEnergy Capital Corp.
The sunny-side-of-the-street prediction from the Calgary-based investment bank stands out from a number of bearish forecasts, including last month's report from Goldman Sachs Group Inc. that said many years and a price of $20-a-barrel (U.S.) might be needed to clear the oil glut.
However, the FirstEnergy forecast comes as other positive indicators emerge, including a U.S. Energy Information Administration forecast Tuesday that crude oil production is likely to decrease through mid-2016 and signals that Saudi Arabia and Russia are trying to come to an agreement to support oil prices. Brent and West Texas intermediate (WTI) crudes rose to one-month highs on Tuesday.
"It's a bumpy bottom. It's not necessarily a rocket ship back to the top. Nevertheless, we think this is a positive turning point for crude oil," Martin King, an analyst at FirstEnergy, said in his oil and natural gas market update at the Calgary Petroleum Club Tuesday. "We're peeking around the corner. It is getting a little bit better – there are things you can point at that suggest the market is actually improving."
Giving a ray of hope to Canadian crude producers hit hard by low commodity prices, FirstEnergy is predicting a gradual return to higher crude prices, forecasting an average WTI price of about $50 a barrel this year, $57 in 2016, $68.50 in 2017 and $78 in 2018.
In contrast, last month Goldman Sachs trimmed its 2016 estimate for WTI to $45 a barrel on the expectation that the oil glut will be long-lasting.
There are a number of factors that suggest the market is beginning to "balance," Mr. King said. While the Organization of Petroleum Exporting Countries (OPEC) is expected to continue to pump out high volumes of crude – which won't help any recovery – U.S. crude supplies are easing down and there's still lots of storage space. And while the long-term demand for oil in the United States is predicted to slide downwards, Mr. King said the U.S. economy has been strong and large-vehicle sales are up sharply.
"U.S. demand has been gangbusters this year," Mr. King told the Calgary audience. "They are finally back on the road driving lots and lots and lots of miles, burning up gasoline. I love that kind of stuff."
Mr. King also predicted that Iran's re-entry into world crude markets next year will only be a "moderating" influence on prices, and Chinese demand will hold up better than many predict.
But speaking to reporters following his presentation, he noted that this week's news that Suncor Energy Inc. has launched a $4.3-billion (Canadian) hostile bid for Canadian Oil Sands Ltd. bolsters his forecast.
"Typically, when you look at these cycles over time, when you start to get more consolidation, that's usually a sign you're at the bottom," Mr. King said.
However, he said how much oil Iran injects into global markets and the steadiness of China's economy still loom large as key factors for prices.
While the Canadian oil industry has listed access to markets and new pipeline capacity as a key concern in recent years, Mr. King said he doesn't expect that to be a major issue again until 2018 – or even later if oil sands production growth slows.
"What we can't get to the market through pipe, we can get to the market through rail."
Mr. King also told the audience that he believes no one is banking on TransCanada Corp.'s long-delayed Keystone XL pipeline – which would ship large volumes of Western Canadian crude to refineries on the U.S. Gulf Coast – being approved by the U.S. government.
"We're past this issue," he said. "If it does get turned down … people get up the next day, go to work, the crude still flows – there are still opportunities to get into the U.S. market."
Mr. King also predicted better prices for natural gas in 2016, based on a slowing supply and an increase in demand. He said the United States is looking at growth in domestic use, new liquefied natural gas (LNG) terminals being built and more gas exports to Mexico. Whether Canadian LNG terminals are built remains a wild card, he added.