Categories
News

6 months after the UCP’s new budget, and oil prices dropping again

And with lower demands driven by a still ongoing pandemic, we might not see oil prices rising significantly for some time.

When the finance minister Travis Toews presented the 2020–2021 provincial budget at the end of February, he forecasted bitumen royalties at $3.211 billion for the year.

This forecast was based on the assumption that the price of West Texas Intermediate would be at $58 a barrel.

The forecast is based on modest economic growth in 2020, before growth accelerates over the medium term as pipelines come on-line, oil sands production expands, oil prices and exports increase, and the light-heavy oil price differential narrows in 2020–21. WTI oil prices are expected to remain flat at $58/bbl in 2020-21 and then increase to $63/bbl by 2022–23. Improvements in the energy sector will have a positive impact across the economy.

Fiscal Plan: A Plan for Jobs and the Economy, 2020–23. p. 16

At the beginning of 2020, the price of WTI was $61.06, so this assumption didn’t seem that far off. By the end of January, it was at $51.56. It was down a bit, but it rallied to $53.49 by the middle of February, leading up to the passing of the budget. Still not unreasonable.

However, the price plummeted from there. By the end of February, it had dropped to $44.76. And that was all before the Saudi–Russia price war.

That financial conflict pummelled the price of oil, driving it down to -$37.63 on 20 April 2020, the first time it ever traded below $0.

It’s risen in price since then, but it has yet to fully recover. And the price increases that have occurred have been pretty gradual, staying between $40 and $43.39 since the beginning of July.

Toews learned his lesson and adjusted the WTI forecast in last month’s fiscal update.

The WTI oil price forecast is US$35.60 per barrel for 2020–21. This is down more than $22/bbl from budget. While prices have averaged US$31 for the first four months April 1 to July 31, significant uncertainty continues.

2020-21 First Quarter: Fiscal Update and Economic Statement. p. 4 (link)

That seems more reasonable.

But then this week happened.

On Monday, Saudi Arabia cut its official crude selling price—the first time since June. Saudi has been losing market share in China to the United States, as it imports record volumes of crude oil while prices are low, in an effort to stockpile the oil. Plus US demand for Saudi oil is dwindling, with the most recent figures showing imports to the United States are at their lowest level in 35 years.

As Saudi Arabia discounted their oil this week, it has had ripple effects on WTI trading, with prices as low as $36.22 on Tuesday, down from last Wednesday’s closing price of $42.76.

Luckily, these prices are still slightly better than Toews’ adjusted forecast of $35.60, but they’re a long way off from the original forecast. And with lower demands driven by a still ongoing pandemic, we might not see oil prices rising significantly for some time.

Perhaps they may drop some more, especially as oil enters its weak season. And if it does, what will it mean for the second quarter update? Another reduction forecast?

We’ve already cut more than $2.5 billion from February’s original forecast for bitumen royalties. And with only $686 million left in the forecast, there won’t be much more room to cut.

Maybe it’s time to rethink the strategy of depending on royalty revenues for operational funding.

Like this story?

By Kim Siever

I live in Lethbridge with my spouse and 5 of our 6 children. I’m a writer, focusing on political news, social issues, and the occasional poem. My politics are radically left. I recently finished writing a book debunking several capitalism myths. My newest book writing project is on the labour history of Lethbridge.

I’m also dichotomally Mormon. And I’m a functional vegetarian: I have a blog post about that somewhere around here. My pronouns are he/him, and I’m queer.

2 replies on “6 months after the UCP’s new budget, and oil prices dropping again”

What I find rather interesting is most major resource consulting firms (GLJ, Sproule, McDaniel) back before 2020 were forecasting domestic WTI to be above $60/bbl in 2020, with an steady upward trend into the future. Now if you go and pull GLJ’s most recent forecast (July 2020), the forecast predicts that 2021 will have a constant of $44 in 2021 (which seems admittedly high considering how 2020 has been trending), however, then for the next 4 years, prices to increase on average by 5.8%, which is above inflation even. I am always curious how these engineers come up with these price decks. If you look at the same trend in price changes from their Oct 2019 projections, no single year has a price increase of above 2%. I don’t see how the supposed experts in the field are expecting a return to normal in the coming years for oil, but they are.

One source for the curious (https://www.gljpc.com/historical-forecasts), take whatever period you’d like and consider the constant WTI for oil (as most Alberta companies use this in their reserve reports for accounting purposes).

Comment on this story

This site uses Akismet to reduce spam. Learn how your comment data is processed.