Higher oil prices are expected to bolster returns as Canadian energy companies report third-quarter results over the next few weeks, but observers say a recent stall in the crude price recovery and ongoing oil market uncertainty make increases in production and spending plans unlikely.
Oil prices stabilized in the third quarter with U.S. benchmark West Texas intermediate crude selling for an average of US$40.85 per barrel. That’s up 44%, or US$12.48 per barrel, from a second quarter that included the first-ever negative WTI close in April amid fears that North American crude storage was nearing its limit.
The Edmonton Par price for Canadian light oil jumped by 61% to $49.75 per barrel and the price for oilsands bitumen-blend Western Canadian Select rose 81% to $42.31 per barrel, according to a report from RBC.
“While oil prices saw a big jump quarter-over-quarter in Q3, prices continue to be below the levels these companies (with the exception of Canadian Natural Resources Ltd.) require to fund their sustaining capital and dividends, especially given the current refining margin environment,” said analyst Michael Dunn of Stifel FirstEnergy in a report on Friday that noted soft refinery margins.
“While recent inventory drawdowns are constructive, the oil market remains reliant on drastic production cuts from OPEC+ to restore balance to the market, as the pace of demand recovery to more normalized levels appears to have lost momentum in the past several weeks.”
Third-quarter reporting season starts next week with oilsands producer MEG Energy Corp. on Monday, followed by Suncor Energy Inc., Husky Energy Inc. and Cenovus Energy Inc. later in the week.
“The third quarter for the most part was better than the second quarter was, so producers should be feeling better,” said Phil Skolnick, an analyst for Eight Capital, in an interview.
A cautious approach is still expected. “It’s going to be talking about putting that money back toward the balance sheet, … share buybacks and to support current dividends — I don’t think anybody at this point in time will want to increase spending,” Skolnick said.
The ability to move more barrels of oil out of Western Canada has been enhanced recently thanks to incremental pipeline capacity additions but producers’ ability to take advantage is limited by the Alberta’s ongoing oil production curtailment program, introduced at the beginning of 2019 to prop up prices.
Both Skolnick and Dunn said they expect the program, originally intended to expire by the end of 2019, will continue into 2021, with Dunn noting companies likely won’t announce formal plans for 2021 budgets until the Alberta government’s intentions are known.
Many producers in North America are also waiting for results from the U.S. presidential election on Nov. 3 — Democratic hopeful Joe Biden has vowed to tear up the presidential permit for the Keystone XL pipeline project if elected — and an OPEC meeting in early December where output constraints could be adjusted.
Late last week, National Bank Financial cut its forecast for WTI pricing in 2021 to an average of US$42.25 per barrel from US$43.75.
“Following the unprecedented demand hit from Covid-19 earlier in the year, [global] consumption has improved from the lows but remains approximately five to seven million barrels per day below last year,” it said.
“The demand recovery remains uncertain and a significant risk to any sustained oil price recovery, notably as the impact of a second wave of the pandemic is underway.”
The reports notes that Western Canadian oil sector fundamentals remain “constructive.”
It points out oil volumes on pipelines have recovered to just over four million barrels per day after dropping as low as 3.3 million to 3.4 million bpd in late May, while storage inventory has dropped to 21 million barrels, down from 40 million at the beginning of the year.