MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, APRIL 3, 1998 (5)
PRODUCT PRICE AND MARKET FORECASTS
FOR THE CANADIAN OIL AND GAS INDUSTRY
Quarterly Update
April 1, 1998
Prepared by
Carol A. Crowfoot, B.A. Econ.
Senior Energy Economist
April 1, 1998
Gilbert Laustsen Jung Associates Ltd. have prepared the enclosed price
and market forecasts after a comprehensive review of information
available through to March 1998. Information sources include numerous
government agencies, industry publications, Canadian oil refiners and
natural gas marketers. The accuracy of all factual data, from all
sources has been accepted as represented without detailed
investigation by Gilbert Laustsen Jung Associates Ltd. The forecasts
presented herein are based on an informed interpretation of currently
available data. While they are considered reasonable at this time,
users of these forecasts should understand the inherent high
uncertainty in forecasting any commodity or market. These forecasts
will be revised periodically as market and economic conditions change.
These future revisions may be significant.
GILBERT LAUSTSEN JUNG ASSOCIATES LTD.
PRODUCT PRICE AND MARKET FORECASTS
FOR THE CANADIAN OIL AND GAS INDUSTRY
APRIL 1, 1998
Gilbert Laustsen Jung Associates Ltd. has completed a quarterly update
of our commodity price forecasts as presented on the attachments.
Revisions in near-term forecasts reflective of current market conditions have been incorporated. A summary of near-term forecasts
follows:
NATURAL GAS PRICES
January 1, 1998 April 1, 1998 April 1, 1998
Calendar Year Calendar Year Q2-Q4
Henry Hub Gas Price
($US/MMBTU)
1998 2.20 2.25 2.30
1999 2.15 2.30 2.30
Average Alberta Gas Price
($Cdn/MMBTU)
1998 1.60 1.80 1.85
1999 1.85 2.00 2.00
TCGS Gas Price
($Cdn/MMBTU)
1998 1.70 1.80 1.80
1999 1.85 2.00 2.00
Pan-Alberta Gas Price
($Cdn/MMBTU)
1998 1.80 2.05 2.00
1999 1.85 2.00 2.00
ProGas Gas Price
($Cdn/MMBTU)
1998 1.80 1.90 1.90
1999 1.85 2.00 2.00
Canwest Field Gas Price
($Cdn/MCF)
1998 1.05 1.20 1.15
1999 1.25 1.40 1.40
CRUDE OIL PRICES
January 1, 1998 April 1, 1998 April 1, 1998
Calendar Year Calendar Year Q2-Q4
WTI @ Cushing Price
($US/BBL)
1998 19.00 16.75 17.00
1999 20.00 19.00 19.00
Light, Sweet @ Edmonton Price
($Cdn/BBL)
1998 25.75 22.75 23.00
1999 26.75 25.25 25.25
CANADIAN DOLLAR
The Canadian dollar has gained strength relative to the U.S. dollar
over the past few weeks, primarily due to political factors affecting
the Federalist movement within Quebec which international investors
consider positive for the Canadian dollar.
Looking ahead, there are a number of factors pointing to a sustained
recovery in the value of the Canadian dollar. The Bank of Canada
appears set to continue the commitment of protecting the dollar
through interest rate increases and buying the dollar. Additionally,
Canada's economy is strong, enjoying minimal inflation and the
reduction or elimination of deficits. Political uncertainty, as
noted, has also diminished due to the possibility of a new Quebec
provincial Liberal leader who could possibly win an election over the
current ruling separatist party.
The forecast of exchange rates utilized in the January 1, 1998 price
forecast remains reasonable in our view.
WORLD OIL PRICES
A combination of events during the last quarter of 1997 has led to a
severe drop in crude oil prices. In the first two months of 1998, WTI
averaged $US 16.41/BBL, down 31 percent from the same period in 1997.
It is the lowest year-to-date average since 1994, when the price
averaged $US 14.91/BBL. The average price recorded for the first half
of March 1998 for WTI is approximately $US 14.86/BBL. At the 103rd
OPEC Conference in late November 1997, member countries agreed to
raise their crude oil production ceiling by approximately 10 percent,
from 25.033 million barrels per day to 27.5 million barrels per day.
Actual OPEC crude oil production for February 1998 was approximately
28.7 million barrels per day, just over 1 million barrels per day in
excess of the new quota. Coinciding with the increased OPEC quotas is
the UN agreement to double the allowable export revenues Iraq may
receive in each 180-day period through the sale of crude oil. Iraq has
publicly stated that $US 300 million in infrastructure repairs are
required to push production levels upwards. It is unclear just how
much additional oil Iraq will be able to export in the short term due
to the condition of the oil production plants and other
infrastructure.
Thirteen large crude oil producing countries recently announced an
agreement to cut production which, if successful, will remove
approximately 2 million barrels per day of crude oil production from
the global market. Saudi Arabia, Venezuela and Mexico were the main
signatories to the production agreement. The inclusion of a non-OPEC
member is perhaps a sign of new cooperation between all crude oil
producing countries and may well be a deciding factor in the success
of the cutback agreement. It is unclear whether the successful
implementation of the agreement will be enough to bring supply and
demand into balance, and the market is experiencing enormous
volatility due to the uncertainty surrounding the agreement.
Coincident with the increase in world crude oil supply is a drop in
global crude oil demand. Weak heating demand in the Atlantic Basin as
well as relatively weak overall demand in Asia due to the Asian
monetary crisis kept international oil markets in a condition of
relative oversupply from November 1997 until March 1998. The slowdown
in Asian demand and the warm winter in North America have been
estimated to reduce global oil demand by approximately 800 thousand
barrels per day. The combined increase in OPEC production since
November 1997 and the reduction in demand have led to a global crude
oil surplus of approximately 2 million barrels per day. As storage
facilities become full, the downward pressure on price will become
more intense unless there is a reduction in supply.
The near-term WTI crude oil price forecast has been lowered relative
to the January 1, 1998 price forecast for the remainder of 1998. This
reflects the lower Asian demand and incorporates the possibility that
not all oil exporters will honor production-cutting commitments or, if
they do, that the production cutbacks will not be adequate. The
forecast has been slightly lowered for 1999 and 2000 relative to the
January 1, 1998 forecast.
CANADIAN CRUDE OIL PRICES
The Light Sweet crude oil price at Edmonton for the first two months
of 1998 averaged approximately $CDN 22.81/BBL, compared to $CDN 31.51
for the same time period in 1997. The average price for the first half
of March, 1998 is approximately $CDN 20.26/BBL. Relatively strong
crude oil prices during 1996 and 1997 stimulated crude oil drilling
which exceeded both export pipeline capacity and market growth. Crude
oil pipeline capacity constraints are still apparent with continued
high apportionment levels on IPL. IPL's SEP II, slated to be completed
for the second half of 1998, will add incremental pipeline capacity
out of Western Canada of 120,000 barrels per day and 170,000 barrels
per day on the Lakehead Pipeline between Superior and Chicago. As
well, IPL has announced a revised time line for the Terrace expansion
project. The revised proposal will add 270,000 barrels per day of
export capacity and IPL anticipates the line to be completed by late
1999. An additional 370,000 barrels per day can be added in 2002 if
required. Although the strong U.S. demand for light crude and refined
products is expected to continue in the near-term as the U.S. economy
experiences healthy growth rates, global supply is expected to exceed
demand for the remainder of 1998. Canadian producers face stiff price
competition with offshore imports to the U.S., putting additional
downward pressure on Canadian crude oil prices.
Another area of looming concern for the upstream industry in Western
Canada is the IPL Line 9 reversal. Ontario refineries have been
interested in obtaining imported crude due to declining North American
light crude production. North Sea production is light crude and Sarnia
refineries are generally not retrofitted to take heavy crude
feedstock. Possibly losing Sarnia market share and therefore pushing
the WCSB production into the highly competitive Chicago market will
impact light crude production from Western Canada. Initial capacity
upon reversal is 140,000 barrels per day with the ability to increase
to 260,000 barrels per day by the next year with an in-service date in
1998.
The April 1, 1998 Light, Sweet crude oil price forecast at Edmonton is
lower for the remainder of 1998 to 2000 relative to the January 1,
1998 forecast due to the decline in the near-term U.S. WTI price
forecast.
The current crude oil glut has hit the heavy crude oil prices
particularly hard in Western Canada. The price for Bow River blend at
Hardisty for the first two months of 1998 averaged $CDN 14.38/BBL,
versus $CDN 25.15/BBL for the same time period in 1997. The
differential between the Bow River blend at Hardisty and Light, Sweet
crude oil at Edmonton for the first two months of 1998 has reached
$CDN 8.43/BBL versus $CDN 6.36/BBL for the first two months of 1997.
The diluent cost is also very high as the demand for pentanes plus has
grown faster than available supply. Refiners' ability to process heavy
crude oil is lagging far behind supply. Therefore, refineries have
numerous choices of heavy crude sources which, in turn, bids down
feedstock prices. The situation has been exacerbated by the global
surplus of all crude oil types. A decrease in supply will be the first
result of wide differentials as capital expenditure plans for heavy
oil are canceled or postponed based on marginal economics. IPL's
announced accelerated expansion of the Terrace project will also help
to improve the differentials. IPL's proposal to increase the viscosity
limit for 1998 has been approved and the Echo Pipeline, which ships
heavy crude from Lindbergh to Hardisty, has evaluated blending options
that will eliminate condensate as an additive. Husky has announced an
expansion of their upgrader by approximately 23 percent and IPL plans
to build a spur line to the BP Toledo refinery which plans to retrofit
for 110,000 barrels of incremental heavy crude by the first quarter of
1999. The Mustang Project, jointly proposed by IPL and Mobil, will
extend the capability of IPL shippers to reach the Patoka/Wood River
heavy crude refining hub with very competitive tolls.
Differentials for heavy crude oil have been increased in the near-term
relative to the January 1, 1998 price forecast to reflect the current
supply situation but remain unchanged in later years.
US GULF COAST GAS PRICE
The current New York Mercantile Exchange natural gas futures contract
is in contango (current prices lower than outer months), reflecting an
abundance of supply exemplified by high storage levels relative to
1997 and the average of the past three years. The market expectation
of future higher prices stems from fundamentals including declining
production from traditionally important fields, increased demand for
power generation and weather related demand due to an expected hot
summer and cold winter in 1998/1999.
Despite the optimism the market has for natural gas prices for the
summer and next winter, the next three months could well experience
significant price weakness due to the storage overhang. The storage
surplus compared to last year is 313 BCF and compared to the three
year average it is nearly 200 BCF higher. The recent light demand was
illustrated by a recent American Gas Association (AGA) storage report,
which showed a net injection into storage in the producing region
during the last week in February. Currently, the market has not
factored in lower demand for natural gas due to the drastically lower
residual fuel oil prices which compete with natural gas in those areas
where fuel switching is possible. Lower demand for natural gas for the
remainder of 1998 and 1999 will occur if crude oil prices remain low.
The near-term Henry Hub natural gas price forecast has been increased
to reflect the current market outlook for the remainder of 1998 and
1999. Without the post-El Nino summer and winter weather expectations,
combined with additional Canadian gas entering the Chicago hub late in
1998 and lower demand due to low residual crude oil prices, the Henry
Hub price may prove to be unable to maintain current market
expectations.
CANADIAN GAS PRICES
Western Canadian producers are hoping natural gas prices will sustain
their strength in light of the dramatic fall in crude oil prices.
Natural gas in the Western Canada Sedimentary Basin is experiencing
surprising price strength for the summer of 1998 considering that the
heating season of 1997/1998 was one of the warmest El Nino winters
seen in recent years. The lack of winter related heating demand has
resulted in gas storage being approximately 20 percent higher than the
same period last year. The market psychology contributing to the price
strength is the belief that fewer gas wells will be drilled in early
1998 due to an early spring breakup and therefore Nova field receipts
will not significantly increase. Additionally, although the California
reservoir levels are very high, the market is anticipating strong
summer demand for natural gas based on the belief that the summer of
1998 will be warm and air conditioning demand will be strong. This
reasoning also applies to Eastern Canada despite the even higher
storage overhang that exists in this demand region, at double the
amount in storage compared to this time last year. Finally, the market
is anticipating an early startup on the Northern Border capacity
expansion for some of the incremental capacity as early as September,
1998 which is hoped to reduce the basis differential between Alberta
and the U.S. markets, thereby increasing netbacks in this region.
The AECO-C spot price is currently around $CDN 1.83/MMBTU with the
market anticipating significantly stronger prices for the 1998/1999
heating season in the range of $CDN 2.47/MMBTU at AECO-C. The Canadian
natural gas aggregators are anticipating healthy netback prices for
the 1998/1999 heating season and beyond in light of the relative
strength in the U.S. prices, the strong Alberta spot prices and the
incremental export capacity. As incremental export pipeline capacity
is added, long-term aggregator netback prices and spot prices are
forecast to achieve equilibrium.
Gilbert Laustsen Jung has made an upward revision to the Alberta and
British Columbia natural gas prices for the remainder of 1998 and 1999
relative to the January 1, 1998 forecast to reflect current market
expectations. The revised prices are moderated due to concerns
regarding the current high storage levels and the possibility that
demand will not be as robust as expected, particularly during the
summer months. The long term price forecast remains unchanged based on
the assumption that additional export pipeline capacity will continue
to narrow basis differentials and improve netback prices in this
basin.
NATURAL GAS LIQUIDS AND SULPHUR
Propane stocks in both Western and Eastern Canada are higher this year
compared to the same time period last year. Butane stocks overall are
also up this year, although by a smaller amount. Spot prices for
propane at Edmonton have fallen from record highs seen last winter to
more moderate levels of approximately $CDN 15.20/bbl for the first two
months of 1998. The current spot price for butane at Edmonton average
$CDN 15.20/BBL for the first two months of 1998.
Gilbert Laustsen Jung has decreased the 1998 propane and butane price
forecast at Edmonton relative to the January 1, 1998 forecast to
reflect current price levels and the lower crude oil price forecast.
The negotiated sulphur price at Vancouver has fallen for the first
quarter of 1998 as the sharp drop in prices in Brazil and lower price
offered in Egypt and Jordon indicate the continued weakness in the
international sulphur market. The price cut in Brazil has resulted in
competition among Canadian suppliers and will likely lead to further
price erosion, as stocks at Vancouver are high. For Canadian
producers, the recent reductions in prices will mean plant gate
netbacks close to zero or possibly negative.
Gilbert Laustsen Jung has lowered the near-term FOB Vancouver sulphur
price forecast relative to the January 1, 1998 forecast due to the
current supply situation.
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