Varcoe: 'Chatter of $100 oil' highlights divergence of crude, natural gas prices for Canadian producers

For Canada’s oil and gas sector, 2024 is shaping up to be a tale of two commodities that are heading in distinctly different directions

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Oil prices have marched higher over the past month — and talk of $100-a-barrel crude is in the air — while natural gas prices across North America continue to languish.

For Canada’s oil and gas sector, 2024 is shaping up to be a tale of two commodities that are heading in distinctly different directions.

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As the heads of Canadian petroleum producers made their annual trek to Toronto for the BMO Capital Markets CAPP Energy Symposium this week, a divided outlook faces the sector.

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Natural gas prices in North America remain weak due to high inventory levels and warmer-than-normal winter weather crimping demand.

South of the border, some U.S. producers are shutting in their gas. In Canada, a handful of firms have deferred gas drilling or have shifted spending to oil.

Meanwhile, benchmark U.S. oil prices are up more than 20 per cent this year.

And a new forecast by energy analytics firm Enverus projects that global oil demand will not peak this decade — as some agencies have predicted — but is expected to continue rising.

Benchmark West Texas Intermediate (WTI) crude reached a six-month high last week, trading above US$87 a barrel on Friday, before closing down $1.20 on Tuesday at $85.23.

Some forecasters are raising their projections, saying oil prices could near or even top $100 a barrel at some point this year, although it would likely be short-lived.

On Tuesday, the CEO of Vitol Group — the largest independent oil trader in the world — told a conference in Switzerland that crude prices are likely to stay between $80 and $100 a barrel in 2024, as demand increases by nearly two million barrels per day (bpd), according to a report by Bloomberg.

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In Canada, the price differential between WTI and Western Canadian Select heavy oil has also been shrinking with the approaching startup of the Trans Mountain expansion project.

“You watch oil prices go up and differentials squeeze in, I just can’t remember a time when it’s been this good,” Brian Schmidt, CEO of Tamarack Valley Energy, a mid-sized oil producer in Western Canada, said in an interview.

“There’s chatter of $100 oil . . . It’s not sustainable. But you know what? Basically anything (at) $75 to $80, you should be jumping for joy.”

Brian Schmidt, president and CEO of Tamarack Valley Energy
File photo: Brian Schmidt, president and CEO of Tamarack Valley Energy is pictured along with his bronze sculpture Portrait of a Roughneck by Don Toney on Friday, January 2, 2015. Photo by Ted Rhodes /Calgary Herald

Several forces are pushing oil markets higher this year, including rising global demand, stronger-than-expected economic growth and OPEC-plus countries extending production cuts.

Geopolitical factors are also weighing on the market.

The U.S. Energy Information Administration recently increased its forecast for Brent crude, projecting it will average US$89 a barrel this year and $87 in 2025.

“We have seen resilient global demand for oil,” Brad Wells, head of energy at BMO Capital Markets, said from Toronto.

“We’ve seen many years of relatively minimal reinvestment in supply.”

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Al Salazar, a director at Enverus Intelligence Research, noted the firm increased its forecast for Brent crude prices by $5 a barrel, and now expects it to average $95 in the fourth quarter.

He said oil markets could top $100 briefly during the summer when the busy driving season arrives.

“It’s absolutely possible. In fact, the only thing that is keeping us from calling that is the fact OPEC may decide to release some barrels and loosen the cuts in the second half of the year,” Salazar said.

A report released Tuesday by Enverus projected global oil demand will continue to increase and reach 108 million bpd by 2030 — up from about 102 million bpd last year — and keep growing during the first half of next decade.

Last year, the International Energy Agency made headlines forecasting demand for oil and gas will peak this decade.

Yet, electric vehicle momentum in the United States is slowing, fuel economy standards continue to miss targets and a lack of new oil supply will likely propel prices higher after 2030, Salazar said.

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For gas, the outlook is different. The U.S. EIA says that even with lower production anticipated this year, it expects to see record amounts of gas in storage when the winter season begins in November.

It forecasts benchmark U.S. gas prices will average $2.20 per mmBTU this year.

In Canada, the country’s largest gas producer, Tourmaline Oil Corp., said in March it would reduce its forecast capital budget by $220 million this year to $2.13 billion given weak gas prices.

LNG Canada export terminal in Kitimat, B.C.
Cooling towers used to dissipate heat generated when natural gas is converted into liquefied natural gas are seen under construction at the LNG Canada export terminal in Kitimat, B.C. on Wednesday, September 28, 2022. Darryl Dyck/The Canadian Press

Birchcliff Energy CEO Chris Carlsen, whose company announced in January it would defer drilling 13 gas wells planned for the first half of the year until later in 2024, said Tuesday the company will carefully consider its decision in June.

Carlsen expects the supply-demand situation to improve when the massive LNG Canada terminal begins operating within the next year, exporting domestic gas to Asia.

“The narrative of pessimism into the summer . . . you can turn that into optimism of late 2024 and then into 2025, with LNG coming on,” he said.

Some gas producers also are benefiting from higher oil prices due to their output of natural gas liquids.

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NuVista Energy CEO Jonathan Wright pointed out two-thirds of the company’s production is natural gas, while two-thirds of its cash flow comes from condensate, which is tied to oil prices.

“We’re always going to have a bit of a weather lottery with natural gas, but it always solves itself because now we’re seeing production moderate,” he said.

But it will take patience.

“We’ve tooled our companies to be able to weather those difficult times,” said CAPP chair Paul Myers, CEO of gas producer Pacific Canbriam Energy.

“We are going to have some tough times over the next year and a half or so, and then we will start to see that change.”

Chris Varcoe is a Calgary Herald columnist.

[email protected]

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