December 31, 2018

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Sproule Commodity Price Outlook
December 31, 2018

Sproule Crude Oil Outlook

2018 saw a variety of storylines shaping crude pricing – rapid US LTO production growth, sanctions on Iran, Saudi Arabia and Russia rebounding from production cuts, to name a few. Global crude pricing followed an upward trajectory for much of the year as geopolitics lifted pricing into the $80US/bbl range (Brent) by September. However, market fundamentals quickly reduced prices as production growth from US LTO, Saudi Arabia, and Russia extinguished fears of a global supply shortage. After 12 months of volatility, we leave 2018 close to where we started, with Brent in the mid $50’s US/bbl.

Looking into 2019, once again we are seeing OPEC plus Russia production cuts dominating the crude market narrative. Recent history has demonstrated the effectiveness of OPEC production cuts in supporting global crude pricing and we expect to see similar results this time around. The December 2018 announcement of 1.2 million bbl/d supply curtailment should balance markets by early-to-mid 2019, returning crude prices to $70 US/bbl and $63 US/bbl for Brent and WTI, respectively, for 2019. Long-term we anticipate this $7 Brent-WTI differential to narrow to only $3 as US crude pipeline capacity to the gulf coast is expanded. Our 2021+ outlook for Brent is $73 US/bbl, with WTI leveling off at $70 for 2021+.

Sproule’s price outlook for Canadian crudes sees current differentials narrowing significantly by Q2 2019, as the Alberta government’s 325,000 bbl/d mandated production curtailment takes effect. By mid-2019 we expect crude-by-rail capacity to reach 400,000 bbl/d as producers turn to rail as their only viable option to support production growth in the absence of new pipelines. Additionally, by late 2019 the Enbridge Line 3 expansion is expected to add 370,000 bbl/d capacity to the system. Combining these factors together, we see the WTI-Canadian Light Sweet and WTI-WCS differentials falling to approximately $5 US/bbl and $17 US/bbl respectively in 2019. While Canadian light oil faces competition from US LTO plays, new market opportunities are arising for Canadian heavy crudes. US Gulf Coast refiners are increasingly seeking Canadian heavy oil as imports from Venezuela and Mexico decline. One headwind to Canadian heavy crude pricing, however, will be the International Maritime Organization’s IMO 2020 which reduces marine fuel sulphur content limits from 3.5% to 0.5%. An associated reduction in residual fuel oil demand will reduce refinery margins, which we expect to transfer back to Canadian producers as an additional $2 – $3 US/bbl discount to the existing WTI-WCS differential. The dynamics affecting Canadian oil prices are reflected in a long-term narrowing of the CLS differential to $3 US/bbl below WTI, and the WCS differential to $15.50 US/bbl below WTI 2023+.

Sproule Natural Gas Outlook

The US continues to produce record volumes of gas, primarily from the Appalachia shale gas region in the US Northeast, and significant associated gas from light tight oil plays. The demand picture for gas in the US looks good, with increasing LNG export capacity, growing natural gas power generation, and strong exports to Mexico. In particular, the connection of North American gas to the global LNG market will create a more global market for gas, which will support greater alignment in global gas prices longer term. However, the record supply growth in the last year (10bcf/d YoY) more than meets this growing demand and will act as a ceiling on pricing, which we now think will be sustained over the forecast period. We expect 2019 Henry Hub pricing around $3 US/MMbtu, rising to $3.50 long-term (2021+).

The healthy US supply picture means that Canadian producers have even more volumes to compete against in an already over-supplied market. Gas exports from Canada to the US have been declining over 2018 and we expect this trend to continue as the US is able to meet their own gas demand needs. Pricing at AECO, while much better than it was a year ago, will continue to feel downward pressure because of competitive pressures with gas-on-gas competition from the Marcellus/Utica and associated gas from the Permian in particular. Also, significant debottlenecking upstream of James River will be needed over the next couple of years before a semblance of stability returns to the Western Canadian gas market. The announcement of the LNG Canada project will be a positive driver for future export options and pricing of Canadian gas, but it will not provide immediate relief to Canadian producers. To reflect these factors, Sproule’s outlook at AECO is $1.95 CAD per MMbtu 2019, increasing to $3.00 CAD per MMbtu by 2021+.