Deloitte report says increased U.S. production, transportation bottlenecks
and lack of refining capacity in Canada are responsible for widening price differentials
CALGARY, ALBERTA (April 3, 2018) – Prices for Canadian crude oil have fallen further behind those in the United States as pipeline bottlenecks continue to limit the amount of oil that can be transported from Canada to U.S. refineries. The price differential between West Texas Intermediate (WTI) and Edmonton Light oil was US$7.32 a barrel in January 2018, an 86-per-cent increase on the average differential of US$3.93 a barrel in the fourth quarter of last year. Deloitte’s Resource Evaluation and Advisory (REA) group says in its latest forecast that this differential could begin to return to more normal levels once the Sturgeon Refinery in Alberta begins full operations later this year.
“Refining capacity in the United States has been at its tightest in more than a decade at the start of this year because of strong U.S. crude oil production in 2017, but that has started to ease as some wells were capped over the past three months,” says Andrew Botterill, Partner, Deloitte. “Assuming crude pipelines remain fully operational, increased refinery capacity in the U.S. and the additional capacity of the Sturgeon Refinery in Canada should help to narrow the price gap between WCS and WTI in 2018.”
The differential has been significantly more volatile in recent years, primarily due to the emergence of U.S. shale production and oversupply in Canada, which lacks sufficient domestic refining capacity. Deloitte notes that the announcement by the Alberta Government to support partial upgrading in the province by next year might also help to alleviate some of this volatility as producers get more options to sell crude oil in Canada. WTI prices are forecast to be US$60/bbl in 2018 while WCS prices are expected to be C$50.80/bbl.
Deloitte also predicts a maintaining of the wide price differential of natural gas in the United States and Canada in the coming years, based on spot prices and futures. According to the Deloitte report, with AECO futures averaging well below $2.00/Mcf in both 2018 and 2019, more Canadian companies are hedging AECO prices with supplementary Dawn and other contracts to offset low commodity prices in Alberta.
“At year end natural gas price forecasts from major third-party evaluators varied widely, with AECO forecast prices ranging between $2.00/Mcf and $2.85/Mcf this year, even as prices have dropped through the winter and futures contracts remain below $2.00/Mcf,” says Botterill. “This makes it difficult for producers to forecast robust prices in the coming year.”
Deloitte says it is hard to be optimistic about the near-term prospects of AECO because of continued strong production growth in the United States and the risk of more pipeline outages this summer. As a result, the Deloitte forecast for AECO prices has been lowered even further for 2018, to C$1.90/Mcf, while Henry Hub is forecast to be US$2.80/Mcf.
This edition of the price forecast features exclusive insights into the impact of the US tax reform on oil and gas companies. According to Deloitte, changes to U.S. tax laws that were enacted on December 22, 2017 should provide considerable benefits to Canadian oil and gas companies with significant operations in the United States, who will benefit from the lowering of the federal corporate tax rate to 21 per cent from 35 per cent. Meanwhile, investment in projects in Canada could be adversely affected by companies seeking to accelerate their U.S. production to take advantage of the faster cost recovery of capital investments the U.S. tax reforms now allow.
For Deloitte’s complete oil and gas price forecast dated March 31, 2018, visit our website.
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