Calgary – Increased drilling activity in Canada and the United States, coupled with concerns that demand for oil may not grow enough in 2017 to match available supplies, is putting downward pressure on oil prices, which in March dropped below US$50 per barrel. The latest report by Deloitte’s Resource Evaluation and Advisory (REA) group also notes a weakening of natural gas prices caused by continuing high storage levels and a milder than normal winter in the United States.
“Some of the initial optimism that OPEC production cuts would lead to higher oil prices has dampened, as North American producers ramped up their own drilling activity, which could lead to a continuation of supply outstripping demand in 2017,” says Andrew Botterill, Partner, REA group. “This increased drilling will lead to increased production, as well as the United States record-high stockpile levels, will likely keep oil prices in a narrow window in the coming years.”
Botterill says total U.S. drilling activity has been increasing since last May, with drilling rig counts in March 2017 reaching levels not seen since late 2015. This, in turn, has led to an increase of about 0.5 million barrels of oil per day since August 2016. Canadian production has been steadier, but rig activity has been increasing into 2017, reaching levels last seen in early 2015.
The Deloitte report notes that there could be increased volatility in the market later this year as OPEC decides whether to continue its production cuts and once the full effect of U.S. drilling increases is known. For now, however, the North American market should be able to fill any gap in the supply-demand balance, which will help to keep prices in check. For the rest of 2017, Deloitte is forecasting the WTI price to be US$52 per barrel and the Edmonton Light price to be C$65 per barrel.
Natural gas prices, which reached a high of US$3.42/MMBTU for Henry Hub in January, slipped back to a low of US$2.56/MMBTU in February as a cold winter in the United States failed to materialize. The average heating days for this quarter lagged well behind the last two years, which were also historically warm winters.
Production levels in the United States remained steady at the end of 2016, however, which led to an unprecedented increase in natural gas storage levels in February, a month which usually sees draw downs on storage to deal with increased demand during cold weather.
This softening of Henry Hub prices helped to drive down Canadian gas prices as well, with AECO softening considerably and the differential between AECO and Henry Hub widening due to lower demand for Canadian gas in the United States. Deloitte does not anticipate any drastic change to the natural gas market in the near future and is now forecasting prices in 2017 of C$2.55/Mcf for AECO and US$3.20/Mcf for Henry Hub.
For more information, visit deloitte.com.