Deloitte’s latest oil and gas price forecast predicts softer prices for crude oil in the early part of 2022.
According to the forecast from Deloitte Canada’s Resource Evaluation and Advisory group, the softer prices are due to growing global supply as investment comes back to the sector, coupled with concerns about the impact a new COVID-19 variant may have on global demand.
The report says the release of crude oil from several countries’ strategic reserves and plans for increased production by member states of the Organization of the Petroleum Exporting Countries should put downward pressure on oil prices in the first quarter of the year. However, the advisory group expects natural gas prices to remain higher amid growing demand and tighter supplies.
“The drop in crude oil prices we started to see in the final weeks of 2021 will likely continue for a while as more supplies flow into the system,” said Andrew Botterill, National Leader, Oil, Gas & Chemicals at Deloitte Canada.
“It’s unusual for strategic reserves to be used to try to lower prices, but with domestic oil production in the United States still below pre-pandemic levels, it’s a way that governments can try to moderate the rising cost of petroleum products such as gasoline, which has been adding to concerns about inflation.”
The forecast indicates increased Canadian production of crude oil, coupled with additional OPEC+ production, has pushed up the differential between Western Canada Select prices and those for Western Texas Intermediate by almost 200 per cent since November 2020, bringing them closer to historical values. This oil differential is expected to remain wide as long as there continues to be competitive heavy oil production growth from Canada.
Although the report highlights some recent weakening of North American natural gas prices, it says prices are likely to remain elevated over the winter months compared to last year.
Meanwhile, in Europe, a lack of supply and declining storage levels have pushed prices to levels at or close to all-time highs. Growing liquefied natural gas exports are seen as a major factor driving natural gas demand in the United States, with U.S. Gulf Coast liquefied natural gas facilities reaching a record feed gas demand level of 11.2 billion cubic feet per day in November.
The International Energy Agency reports that the United States is expected to become the largest natural gas exporter in the world this year, ahead of both Australia and Qatar, as it continues to expand its liquefaction capacity.
Deloitte’s latest forecast also includes an assessment of the impact of decarbonization on the Canadian oil and gas sector, pointing out that oil and gas companies are uniquely positioned to contribute more than any other to carbon reduction. This will require considerable investments in infrastructure projects to store carbon, expand hydrogen use, and develop biofuels.
The report states this will take both public- and private-sector support, and governments at all levels will need to find ways to mitigate investor risk.