Varcoe: ‘Gravy to get to 80’ — As oil prices charge higher, outlook brightens for producers and province

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As Canadian petroleum producers prepare to issue their financial report cards later this week, oil markets have delivered a mid-year gift to the sector: a surge in crude prices.

It also bodes well for the province, while a new forecast by financial services company Desjardins projects Alberta will lead the nation in economic growth.

After being marooned below US$70 a barrel for much of June, West Texas Intermediate (WTI) crude prices have bounced up by $10 since the start of July, despite ongoing concerns surrounding the effect of rising interest rates.

Recent moves by OPEC+ members to curtail production, along with expectations of tight supplies and growing global oil demand during the second half of the year, have spurred the rally.

On Tuesday, WTI prices climbed 89 cents to close at $79.63 a barrel, while Brent crude increased 90 cents to $83.64.

“We were making decent money before this run up to $80,” Tamarack Valley Energy CEO Brian Schmidt said Tuesday.

“This would be seen as really positive by all of our peers, and the balance sheets are in great shape and cash flow levels will be strong. So, I think all my peers would say this is gravy to get to $80.”

Thanks to higher oil prices and continued population growth, the province’s economy is forecast to expand by 2.9 per cent this year, according to a forecast released Tuesday by Desjardins.

That’s up from its spring projection of 2.4 per cent, and is expected to outpace the national average of 1.7 per cent growth.

“Our outlook predicts an economic slowdown that begins toward the end of the year, but the oil-producing provinces, including Alberta, face the strongest economic growth prospects over the next couple of years,” said Marc Desormeaux, an economist with Desjardins.

Alberta is also less exposed to volatility in the real estate market and the expected fallout caused by higher interest rates than some other provinces.

Desjardins projects economic growth in Alberta will drop to one per cent next year — with the jobless rate expected to increase to 7.2 per cent — while Canada sees a feeble 0.3 per cent increase in GDP in 2024.

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The sudden rebound in oil prices this summer arrives as a series of companies are set to release second-quarter financial reports over the next week, including Tamarack Valley Energy, Whitecap Resources, Crescent Point Energy, Imperial Oil and Cenovus Energy.

Industry analysts are waiting to see what effect the Alberta wildfires in May had on production levels.

“There’s going to be a lot of noise in the (second-quarter) earnings for these companies,” said analyst Patrick O’Rourke of ATB Capital Markets, noting the fires and regularly planned maintenance on oilsands facilities will affect the results.

Oil producers will benefit from the narrowing discount facing Western Canadian Select heavy oil prices during the spring, relative to benchmark WTI crude, he added.

The results should also provide a window into whether oil and gas executives are looking to alter their capital budgets or shift spending over the coming months, amid expectations that crude markets will likely rise through the year.

“The back half of the year will be strong and we will see strengthening prices, just because of demand and the lack of incremental supply coming forward around the world,” Whitecap Resources CEO Grant Fagerheim said in a recent interview.

“We have seen a pretty good bump from $68 . . . If I were betting, I’d say we set a floor at $70, and we will probably break through $85 sometime in the back half of the year.”

Whitecap previously set its annual capital budget between $900 million and $950 million, and that amount isn’t changing, although the company may look at shifting some spending from natural gas to light oil projects.

Whitecap Resources CEO Grant Fagerheim. Supplied

Last week, the United States Energy Information Administration (EIA) projected higher oil prices in the second half of 2023 and into 2024. It expects Brent crude will average $79 a barrel in the fourth quarter and $84 next year, with WTI trading lower by about $5.

The EIA’s short-term energy outlook cited anticipated production cuts from OPEC+ members — including a pledge by Saudi Arabia to make an additional voluntary reduction of one million barrels per day in July and August — and higher global demand causing inventory levels to fall between July and the end of 2024.

Commodity economist Rory Johnston expects WTI prices to be in the mid-to-high $80s range in the back half of this year — barring demand in China unexpectedly tumbling or Saudi Arabia suddenly deciding to pump more oil.

“What has been really critical about the last two weeks or so is we’ve finally appeared to durably break back above $80 Brent,” said Johnston, founder of the Commodity Context newsletter.

“It does appear the market is tightening and that dovetails nicely with what we’re seeing in the price movement. The big question is still: Is this durable?”

For Canadian natural gas producers, the outlook hasn’t been as bright, although markets have improved from the lows seen earlier this year.

Benchmark U.S. gas prices increased slightly to US$2.75 per million British thermal units on Tuesday. In Alberta, AECO natural gas prices closed Monday at US$2.08 per thousand cubic feet.

“These are decent prices. They are not spectacular,” said Phil Hodge, CEO of Calgary-based gas producer Pine Cliff Energy, noting hot weather and increased power consumption this summer should boost demand in North America.

“We don’t know what will happen in the fall and winter for weather and, therefore, for pricing. But it looks like it will be a very constructive year.”