Every month, Sproule prepares commodity price forecasts for the oil and gas market. The forecast reflects Sproule’s short and long-term views of key global and regional oil and gas commodity price markers and relies on Sproule’s proprietary models, analysis and insights.

December 31, 2019

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Sproule Commodity Price Outlook
December 31, 2019


Sproule Crude Oil Outlook

2019 saw a variety of storylines shaping crude pricing – continued US LTO production growth, US-China trade wars, weakened crude oil demand, and OPEC+ production curtailments to name a few. Starting in the mid $50’s US/bbl (Brent) in January, global crude pricing followed an upward trajectory for the first 5 months of the year as geopolitics lifted pricing above $70US/bbl by April. By June, however, we saw the geopolitical pendulum swing as US-China trade tensions and weakening demand numbers began to weigh on global crude prices, resulting in a low $60’s US/bbl Brent price average for the second half of 2019.

Looking to 2020 and beyond, fears of a global economic slowdown have waned and we expect global crude demand growth to return above 1 million bbl/d. On the supply side, US LTO growth is expected to continue albeit at a slower rate than previous years as producers shift focus from production growth to investor returns in an increasingly capital-starved market. Supply growth outside of the US is expected to surge, with new additions coming from Brazil, Norway, Guyana, and Canada. Faced with this wave of new production, we anticipate OPEC plus Russia will continue their efforts to balance the market via mandated production curtailments for the cartel’s member countries. OPEC’s most recent December 2019 announcement of increasing their mandated curtailments to 1.7 million bbl/d should help to stabilize a well-supplied market in the near-term, with Brent and WTI averaging $65 US/bbl and $61 US/bbl, respectively, for 2020. Long-term, we anticipate the Brent-WTI differential will narrow to $3 US/bbl as new US crude pipeline capacity to the gulf coast comes on-stream. Our 2022+ outlook for Brent is $70 US/bbl, and $67 US/bbl for WTI.

Sproule’s price outlook for Canadian crudes sees the current differential to WTI narrowing over the forecast period. With pipeline infrastructure experiencing delays, rail has proven to be an effective method to improve takeaway capacity. The low capital investment required, short time frame for constructing a new loading terminal and the ability to access key markets flexibly suggest that rail will continue to play an important role in the transportation of crude. 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, could be the International Maritime Organization’s IMO 2020 directive, which reduces marine fuel sulphur content limits from 3.5% to 0.5%. There is potential for an associated reduction in residual fuel oil demand which could reduce refinery margins, creating additional uncertainty when it comes to the expected WTI-WCS differential. The dynamics affecting Canadian oil prices are reflected in a long-term narrowing of the CLS differential to 94% of WTI and the WCS differential to 81% of CLS.

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 strong, 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, continued associated gas supply growth from US LTO plays in particular will act to place a ceiling on pricing, which we now think will be sustained over the forecast period. We expect 2020 Henry Hub pricing to average $2.80 US/MMbtu, rising to $3.25 long-term (2022+).

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 in decline and we expect this trend to continue as the US is able to meet their own gas demand needs. Pricing at AECO will continue to feel downward pressure resulting from gas-on-gas competition from the Marcellus/Utica and associated gas from the Permian in particular. Near-term, AECO prices should see support with the recently announced Temporary Service Protocol on NGTL, which is in effect for the summer of 2020, and prioritizes interruptible delivery and storage injection over receipt services during planned summer maintenance periods. This temporary adjustment should help bring short-term stability to what has been a highly volatile AECO price in recent years. Ultimately, significant debottlenecking upstream of James River will be needed over the next couple of years before long-term stability returns to the Western Canadian gas market. 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 $2.04 CAD per MMbtu 2020, increasing to $2.81 CAD per MMbtu by 2022+.

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