Gary Lamphier, Postmedia News
The crash is over. Now the rebuilding of Alberta’s energy-fired economy begins.
After a brutal 75-per-cent plunge between June 2014 and early February of this year, crude oil
prices appear to have begun the long and painful march toward recovery.
The April futures contract for West Texas Intermediate (WTI), the benchmark grade of U.S. light
crude, jumped nearly six per cent Wednesday to close at $38.46 US a barrel on the New York
Mercantile Exchange.
Good news? Sure. But few producers are generating a profit at these levels. Moreover, a parade
of bankruptcies and defaults among debt-saddled producers, particularly in the U.S., still lies
ahead. Cue the gloomy headlines.
Nonetheless, there is finally a flicker of hope for this province’s hard-hit energy industry.
Since the near-month WTI futures contract bottomed out Feb. 10, it has jumped an impressive
$12.25 a barrel, or almost 47 per cent, propelling the Toronto Stock Exchange’s key energy
subindex to a gain of more than 30 per cent.
That in turn has injected new life into this aging, seven-year-old bull market, pushing the major
U.S. and Canadian equity indexes to the highest levels of the year as of Wednesday’s close.
Toronto’s bellwether S&P/TSX Composite Index is up nearly 14 per cent from its January lows,
clawing its way back to levels last seen in early December. The loonie has also taken flight,
topping 77 cents US on Thursday.
No one rings a bell at market bottoms, as the old adage goes, and the fact that crude prices finally
ended their long decline just north of $26 per barrel is only clear in hindsight.
But Wednesday’s advance — driven by plans among major producers to discuss output caps at a
meeting in Doha, Qatar, next month, along with a weaker greenback and a smaller-than-expected
uptick in U.S. crude inventories — served as an exclamation point on a rally that has surprised
the skeptics.
Brent crude, the key international grade, is also on a roll. It jumped nearly $1.60 a barrel
Wednesday to close at $40.33 on London’s ICE Futures Exchange.
The lows we saw in early February were probably the lows for the year.
Although Alberta’s energy producers are expected to continue to announce layoffs, asset
writedowns and hefty losses for the current quarter, with weaker players likely to disappear or be
gobbled up in coming months, the stage is now set for a gradual industry recovery.
A year or two from now, most analysts expect prices to be higher — perhaps significantly higher
— than they are currently.
“I think, along with a growing chorus of people out there, that the lows we saw in early February
were probably the lows for the year,” says Martin King, commodity analyst with Calgary-based
FirstEnergy Capital.
“Every day now, we’re tilting in the direction of it being a little bit tighter in terms of U.S.
supplies. Refinery maintenance season is just about over now, and demand still looks pretty
good,” he adds.
“My guess is that global oil demand will actually hold up even better than what the International
Energy Agency has said. So we are trending back to a much tighter market.”
U.S. crude output, which peaked at 9.7 million barrels a day (b/d) last year, has been trending
lower for months now. It’s currently around 9.1 million b/d and King expects it to drop to
roughly 8.4 million b/d by the second half.
As production drops elsewhere outside the Organization of Petroleum Exporting Countries
(OPEC) and worldwide oil consumption continues to grow, he figures that should slowly sop up
the current global supply surplus of about two million b/d.
King is hardly forecasting a return to triple-digit oil prices, of course. His current projections call
for WTI prices to average just $37.25 a barrel this year, reaching a high of $45 by the fourth
quarter, and $55 in 2017.
He also doesn’t rule out the possibility of another dip in prices if oil traders begin to doubt the
commitment of big global producers like Russia, Iraq, Saudi Arabia and others to any output cap
at their meeting in Doha on April 17.
“Prices have been partly talked up by this talk of a production freeze, but they’ve got another
whole month to keep talking up the market,” says King. “So whether the market will see through
that eventually I don’t know. But traders do seem to be looking through the current high
inventory levels and prices just keep marching higher.”
That said, King believes the underlying trend in crude prices is now up, not down, and he doubts
that oil will slip below the $30 level again in this cycle.
“I think the bottom has been put in place now, and it’s going to be a gradual recovery from here.
The boom times will be a while in coming back. There is going to be a period of consolidation
and rebuilding now, and that could easily stretch out for more than a year yet,” he says.
That’s little solace for the thousands of Albertans who have already lost their jobs, their homes
and their businesses. But for those who are still hanging on, there is finally a flicker of hope that
better days lie ahead.
http://business.financialpost.com/news/energy/the-oil-price-crash-is-over-let-the-recovery-of-
albertas-hard-hit-economy-begin?__lsa=573d-0095
