Despite the war in Iraq, oil and gas prices will stay strong for at least the next year, predict industry analysts.
During a seminar hosted by the Economics Society of Calgary last Friday at the Calgary Chamber of Commerce, analysts forecast that crude oil will stay in the $28 US per barrel range this year, and drop to $25 next year.
“We don’t try and predict outcomes of war,” said Martin Molyneaux of First Energy Capital Corporation. “We try and look right through it. But when we look right through it, we see a supply and demand situation that’s still fairly tight.”
Instead of worrying about the effect of the war in Iraq, analysts are more concerned about depleting supply in Canada’s Western Sedimentary Basin and the U.S. Canadian producers enjoyed record financial gains last year and in February as prices soared, but for the first time in history, Canada’s oil and gas production declined along with U.S. production. As a result, analysts are anticipating near-record investment and drilling activity this year in Canada, at 17,000 wells.
“We do, fundamentally, need Iraq back pretty much in full swing within the next two or three years, because when you think about it, the world is declining at seven or eight per cent in terms of oil production,” said Molyneaux. “That means we have to go out and find five to 5.5 million barrels a day per year. We need Iraq back into the supply equation ultimately.”
He said it will be difficult for Canadian storage to hit 400 billion cubic feet (BCF) per day by November, while U.S. storage is going to have difficulty reaching 2,800 BCF.
“Producers have to get after more exploration, and they have to do everything in their power to stave off declines (in supply) and enhance their overall production,” said Molyneaux.
Wilf Gobert of Peters & Co. added that, contrary to popular belief, the war in Iraq is not likely to lower oil prices and spur investment in other sectors of the economy, because the world no longer has excess capacity of oil and gas.
Despite the war in Iraq, oil and gas prices will stay strong for at least the next year, predict industry analysts.
During a seminar hosted by the Economics Society of Calgary last Friday at the Calgary Chamber of Commerce, analysts forecast that crude oil will stay in the $28 US per barrel range this year, and drop to $25 next year.
“We don’t try and predict outcomes of war,” said Martin Molyneaux of First Energy Capital Corporation. “We try and look right through it. But when we look right through it, we see a supply and demand situation that’s still fairly tight.”
Instead of worrying about the effect of the war in Iraq, analysts are more concerned about depleting supply in Canada’s Western Sedimentary Basin and the U.S. Canadian producers enjoyed record financial gains last year and in February as prices soared, but for the first time in history, Canada’s oil and gas production declined along with U.S. production. As a result, analysts are anticipating near-record investment and drilling activity this year in Canada, at 17,000 wells.
“We do, fundamentally, need Iraq back pretty much in full swing within the next two or three years, because when you think about it, the world is declining at seven or eight per cent in terms of oil production,” said Molyneaux. “That means we have to go out and find five to 5.5 million barrels a day per year. We need Iraq back into the supply equation ultimately.”
He said it will be difficult for Canadian storage to hit 400 billion cubic feet (BCF) per day by November, while U.S. storage is going to have difficulty reaching 2,800 BCF.
“Producers have to get after more exploration, and they have to do everything in their power to stave off declines (in supply) and enhance their overall production,” said Molyneaux.
Wilf Gobert of Peters & Co. added that, contrary to popular belief, the war in Iraq is not likely to lower oil prices and spur investment in other sectors of the economy, because the world no longer has excess capacity of oil and gas.
The day the U.S. invaded Iraq during the 1990-91 Gulf War, noted Gobert, the price of oil dropped $10.50 and production in Saudi Arabia jumped 5.5 million barrels per day.
Drastic price falls won’t happen again, he suggested, because Saudi Arabia no longer has excess supply, and OPEC will likely tighten export quotas later this month.
“In past years, it was the excess capability to produce oil that caused cheating, and cheating is what caused oil prices to go down,” said Gobert.
“But today, none of the OPEC countries, other than maybe Saudi Arabia, have any remaining capacity. In fact, two or three of the countries, including Indonesia, are not producing at their quota because they’re not capable of doing it.”
Gobert said the war in Iraq and other conflicts could push oil below $20 per barrel, but OPEC’s quotas will likely prop up the price.
“I think the biggest impact on prices will be on the market psychology,” said David Carey of ARC Energy Trust. “You will see wide fluctuations and continued wide volatility of the prices. It can go up or down $1 a day, which is pretty wild volatility. Until there is some certainty there, it’s going to take a while for the market to understand the influences you’ve got from psychology. When is oil coming or not coming?”
Oil prices were in the $33-34 range near the end of 2002 but fell as the Iraq war loomed.
The U.S.-led coalition has boasted that Saddam Hussein is no longer in control of the country, suggesting that the rebuilding of Iraq’s oil industry could start in the near future.
Bruce McDonald of Canaccord Capital said investors seem to be losing their fear of the war’s effects.
“There probably isn’t as much of a war premium as people were led to believe,” said McDonald, who monitors royalty trusts.
“There was definitely more of a war premium in commodity prices three months ago, four months ago than there is right now. There’s a lot more stability right now based on actual economic fundamentals as opposed to political-risk fundamentals. I think that should allow investors to come back into the trust base a little bit stronger.”
Still, Peter Linder of DeltaOne Energy Fund said he is “not even going to try to guess” price trends. “We need some demand structure,” said Linder, contending Canada is in “a very precarious situation.”
Gobert of Peters & Co. said that alternative energy sources present a risk of “demand destruction,” but they are not yet well enough developed to make a serious dent in the market. High demand for oil may also slow their use. Analysts are also predicting high natural gas prices, in the $6-$8 per million cubic feet, because colder temperatures, which drive up the use of gas-fired home-heating systems, are anticipated later this year.
A large, efficient pipeline system, which ensures U.S. access to Canadian gas with no interruption by international events, and significant new supply in northern Canada will keep gas prices strong for the next decade, Molyneaux said.
But don’t ask him to bet the mortgage on his prediction. Just when analysts think they’re right, he said, something happens to prove them wrong.
“You've got to get all consumers, somehow, to contract their demand,” said Molyneaux.
“Consumers of natural gas are fickle,” he added. “You might not have a problem with the house at 68 or 65 degrees for a week, but if you have a problem with that per month, you could very well crank (the thermostat) up. Hockey playoffs are on and they’re cold, so they’ll crank it up. It’s just as simple as that.”
