Deloitte sees weaker — but steadier — silver lining for Canadian oil markets

First the bad news: the Canadian oil market is expected to be weaker in 2024 than it has been over the past two years, according to Deloitte’s annual market evaluation.

The good news is weaker oil markets will usher in an extended period of stability that will offset declines in prices. That in turn will allow for modest growth opportunities that should result in a healthier industry overall, even as domestic producers (hopefully) begin offshore oil exports for the time.

"(Last year) was a year of volatility in oil markets largely caused by rising geopolitical tensions, but unlike previous years, these tensions did not drive up prices as would normally be the case," said Andrew Botterill, Deloitte’s National Oil, Gas & Chemicals leader. 

"Slowing global growth demand for crude oil and increased US production to compensate for much of the cuts by OPEC+ countries means prices are about where they were in late 2021."

World oil prices have been hovering near the Alberta government’s break-even of about USD$71. On Thursday WTI closed at $72.55, up about $1.33 on the day, while Alberta’s signature Western Canadian Select was going for $53.18 ahead of a ruling on Friday to proceed with the Trans Mountain expansion.

The Deloitte forecast notes falling prices for West Texas Intermediate (WTI) widened the differentials with Edmonton Light and Western Canadian Select (WCS) in 2023, leading to increased takeaway pressure for Canadian producers, who responded by significantly increasing crude oil by rail shipments since the summer. 

But much of that pressure on the transcontinental pipeline system should be eased if and when the Trans Mountain expansion begins operation later this year, which in turn should bring more stability to Canadian price differentials and in turn, steadier revenue streams and higher production.

Likewise, natural gas prices are likely to stay on the lower end of the scale due to a warmer than usual winter and higher associated production from US oil wells.

The silver lining is lower overall gas prices favour Canada’s thermal heavy oil producers by reducing production costs and provide lower feedstock prices for petrochemicals and other secondary end uses. It also means lower power and home heating bills for consumers.

Deloitte pointed to Dow Chemical's recent announcement of an $11.5-billion project to renovate and expand its plant in Fort Saskatchewan as an example of how lower prices can actually spur investment decisions — thanks also in part to government incentives.

In other words, its a wash.

"Despite the weak market as we enter 2024, Canada's chemical and oil and gas industries still have a lot of opportunities because of our abundant natural resources," Botterill said. 

"Going forward, we expect to see governments using a combination of policies, regulations and incentives to try to guide investments that will accelerate Canada's energy transition while also helping companies diversify and grab a larger share of the emerging energy supply chain."