While several factors are likely to constrain prices, Deloitte Canada sees potential
Canadian oil and gas firms may be pressured by lower prices in 2024 as global factors weigh on demand, but the energy transition is gathering pace.
Deloitte Canada’s latest outlook notes that U.S. crude oil stockpiles remain elevated and milder winter conditions and slowing growth are impacting global oil and gas demand, and prices have fallen to their lowest levels in two years, and even continued geopolitical issues have not forced prices higher.
"2023 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," says Andrew Botterill, National Oil, Gas & Chemicals leader at Deloitte Canada. "Slowing global growth demand for crude oil and increased U.S. production to compensate for much of the cuts by OPEC+ countries means prices are about where they were in late 2021."
The report highlights how the fall in West Texas Intermediate prices increased the differential with Western Canadian Select with Canadian producers ramping up exports by rail due to constrained U.S. pipeline system, which should be eased as the TMX pipeline comes into operation, which should facilitate greater stability for the Canadian price differentials.
Natural gas prices are expected to be roughly in line with 2023’s steady level in the near term.
"Given the high storage levels in North America and Europe, and with El Niño likely to result in another mild winter, we expect natural gas prices in 2024 to remain very similar to what we saw last year," says Botterill. "It's possible however that some cold weather late in the season in Canada, if it arrives, could keep prices from collapsing at the end of the heating season."
Recently, Garey Aitken, head of Canadian Equities and Portfolio Manager at ClearBridge Investments, a specialist investment manager of Franklin Templeton, shared with Wealth Professional that a hard landing for the Canadian economy is likely and that will impact the energy sector.
“We are more bearish on cyclical sectors such as materials and energy, due to the potential for weakening global demand, and financials, which are already discounting a recession,” he said. “We expect to remain underweight these sectors but will continue to monitor them for selective opportunities.”
Energy transition opportunities
As the energy transition becomes even more in focus, Deloitte Canada’s outlook adds in the chemical industry which will play an important role and could provide some potential for investors.
"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," said Botterill. "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."
One example is Dow Chemical's $11.5-billion project to renovate and expand its plant in Fort Saskatchewan, Alberta which will benefit from up to $400 million in federal investment credits and up to $1.8 billion in rebates through the Alberta Petrochemicals Incentive Program (APIP).
Botterill says such incentives can help companies overcome some of the financial challenges of major projects like these.
