Canadian oil producers are having their hopes dashed for a rebound in crude prices in the second half of the year, as prices swoon under the weight of stubbornly high supply and a weak global economy.
Several prominent Calgary-based producers are set to announce their second-quarter earnings this week – including Husky Energy Inc., Suncor Energy Inc. and Cenovus Energy Inc. – and the results – while an improvement on the first quarter – won't be pretty.
The industry was counting on rising demands and deep cuts to capital spending and North American drilling activity to send crude prices higher, even as they cut costs in order to cope with the downturn. Instead, U.S. production remains near record levels while the number of working rigs actually rose for the past three weeks. OPEC has boosted output rather than cut back, and turmoil in Greece and China has cast a cloud over the global economy. On top of that, the rising U.S. dollar has put downward pressure on crude prices and the Iranian nuclear deal will put more oil on world markets in the coming months.
Crude continued its month-long skid on Monday, as financial and commodity markets worldwide reacted to a further rout on China's stock exchange, which is raising concerns about the state of the world's second-largest economy. West Texas intermediate fell Monday by 75 cents – or 1.6 per cent – to a four-month low of $47.39 (U.S.) a barrel. The trendsetting WTI was trading at $60 a month ago; it hit a low of $44.20 last January after OPEC refused to cut production to deal with a growing supply glut.
"I think the path of least resistance is lower for prices for now given the macro backdrop is fairly bearish," Amrita Sen, an analyst at London-based Energy Aspects Ltd., said in an e-mail Monday "U.S. rigs [numbers] were definitely a key factor as that adds to the fears that U.S. production continues even at these low prices with the inventory overhang rising further."
Many analysts had expected the industry's pullback on capital spending early this year to result in lower production as early as this summer, particularly in the U.S. shale oil sector where intensive drilling is needed to offset high decline rates per well and maintain output.
"The restoration of oil market balance in the second half was going to partly come from a supply-side response, but so far we haven't seen much – if any – decline in world oil production," Bank of Nova Scotia commodity economist Patricia Mohr said Monday. Ms. Mohr released a revised outlook on Monday, cutting her forecast for 2015 to $54 a barrel and for 2016 to $59, down $5 a barrel in both cases.
Ms. Mohr noted that, despite a 50-per-cent decline in the number of rigs operating in the U.S. since the end of 2014, production remains at or near peak levels, confounding expectations of a meaningful decline. At the same time, the increase in WTI prices in April, May and June above $60 resulted in a small uptick in the number of working rigs.
The International Monetary Fund has cut its forecast for the global growth significantly over the course of the year. Earlier this month, it said the world economy would grow by a tepid 3.3 per cent this year, before accelerating to 3.8 per cent pace in 2016.
Calgary-based energy economist Judith Dwarkin said she now expects prices to average below $50 for the remainder of the year and the first half of 2016, as supply continues to outpace demand.
"The pace of the global stock build should abate somewhat, but there's still a pretty strenuous stock build, and that will prevent too much upside in prices," Ms. Dwarkin, chief energy economist at ITG Investment Research ULC, said in a telephone interview.
As a result, there will be no relief for the hard-pressed Calgary-based producers – other than the benefits of a lower loonie for those that sell in U.S. dollars but whose costs are incurred in Canadian currency.
"The cash is going to continue to be constrained, and it's up to the banks how much they want to keep lending," she said. "It's pretty ugly and likely to remain so for a few more quarters."