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MNP's TAKE: The future path for oil prices is central to the Conference Board of Canada's economic forecast for oil-producing provinces Alberta, Saskatchewan and Newfoundland. The board sees modest growth potential for the prairie provinces in 2016 as demand catches up with crude supply, curtailed by poor prices, but not for Newfoundland.
While most oilfield service companies are prepared for and living through the downturn,having a strategy to capture opportunities ahead of a rebound will differentiate you from the rest.
To find out how MNP can help, contact Lee Plamondon, CPA, CA, at 780.769.7809 or [email protected]
BY GLEN HODGSON FROM THE GLOBE AND MAIL
About a year ago, the Conference Board of Canada made the then-bold call that Alberta would experience a recession in 2015. Our Alberta forecast was not only prescient, but has also proved to be a bit optimistic. Our initial recession call was made when West Texas intermediate (“WTI) oil prices had tumbled to $65 (”U.S.) a barrel and investment plans in the oil patch were still largely intact. Oil prices of course continued to fall into 2015 and will average about $45 for the year. As a consequence, the negative effect on revenues, profits and oil sector investment has been even more severe than in our initial view.
For example, while we expected a 30-per-cent contraction in Canadian oil sector investment, the pullback is now projected to be at least 40 per cent in 2015. Dramatically lower oil prices through the year have had a sharp effect on business revenues and profits, employment, provincial government royalties and many other segments of the Alberta economy.
As a result, the province’s economy will contract by more than 1 per cent this year.
And Alberta has not been alone.
The deeper-than-expected dive in oil prices, lower business revenues and reduced oil sector investment have seen Saskatchewan and Newfoundland joining Alberta in experiencing an economic contraction through 2015.
The obvious next question is: When do the economies in Alberta and its oil-producing counterparts, Saskatchewan and Newfoundland, hit bottom and begin to grow once again?
For two of the three, we think 2016 will see a recovery. The Conference Board projects that the Alberta and Saskatchewan economies are now near the bottom of the cycle, and will begin to grow in the first part of next year – provided that oil markets stabilize and regain some strength. But Newfoundland will not be as fortunate as its oil-producing cousins.
The future path for oil prices is central to the forecast for these provinces. Prices are under renewed pressure today, principally because OPEC members have failed to agree to constrain their own production. We expect oil prices to remain under pressure but to eventually find a bottom in 2016 and begin to improve modestly.
This view is guided by signs that the traditional commodity cycle is kicking in, but has yet to suppress new oil supply significantly.
Global oil demand continues to rise, thanks to emerging markets.
But a continuing global oil supply glut and the prospect of Iran increasing its production means downward pressure on prices right now.
As noted, oil sector investment in Canada, the United States and other oil-producing regions dropped sharply in 2015 – rig counts were cut in half, which is dampening production in many regions. With lower levels of drilling and investment, North American supply will wane – particularly in the U.S. Bakken (“North Dakota) and Permian (”Texas) shale oil fields, where the marginal cost of new oil production is estimated in the range of $65 to $80 a barrel. The Saudis and other low-cost Organization of Petroleum Exporting Countries members would happily drive these higher-cost North American producers out of the market.
While no one has a crystal ball to forecast oil prices, sustained lower investment and reduced new production will eventually allow oil prices to firm up and begin a slow crawl upward, back toward the marginal cost of new oil production. However, all of this adjustment will take time; it may take several years for West Texas intermediate prices to climb to $70 a barrel.
If this price forecast generally holds true, the level of oil investment in Alberta and Saskatchewan should stabilize in 2016 compared with the preceding year. More buoyant performance in other parts of the provincial economies will help to solidify the recovery; we expect other key economic variables to improve modestly in both provinces, notably employment, incomes, consumption and the housing sector.
Alberta’s recent budget also added a smidgen of fiscal stimulus, which should help a return to growth in that province.
In contrast, Newfoundland will not see the same modest recovery in 2016. The full effect of the pullback in the province’s oil investment and production, along with lower metal prices and slower activity in other resource sectors, has not been felt. Even with an oil price rebound, we project another recession year for Newfoundland in 2016.
So have Alberta and its nextdoor neighbour Saskatchewan hit bottom? Maybe not yet, but there are enough signs emerging for the Conference Board of Canada to forecast modestly better economic prospects for those provinces in 2016.
Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.
This article was written by GLEN HODGSON from The Globe And Mail and was legally licensed through the NewsCred publisher network.
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