Mohr predicts that WTI will recover to the $65 level by the fourth quarter of 2015. “I think the price is going to move up to $65 because there has been such a huge drop in cost of production. Margins are being squeezed for drillers and service providers, but also even wage rates would be moving down a lot in the industry, so the cost of drilling is going to move down a lot,” she said.
Scotiabank’s monthly Commodity Price Index was released Wednesday, and in it Patricia Mohr, the firm’s vice president and commodity market specialist, predicts that the oil price will strengthen this spring after taking a tumble in March.
Indeed, light and heavy crude oil prices took quite a hit in the middle of last month, with WTI dropping to a low of US$43.46 per barrel on March 17. However, it has since rallied, reaching as high as $59.33 on Wednesday — that’s its highest level since December 12 and a 40-percent rise from mid-March.
In terms of what’s driven that increase, Mohr states in her report that there’s been a sharp drop in oil-focused drilling activity in the US and notes that according to the US Department of Energy, US shale oil production leveled out at about 5.618 million barrels per day in April. It may further drop to 5.561 million barrels per day in May, with a more substantial fall anticipated in the second half of 2015.
Price worth getting excited about?
Investors are understandably excited about the oil price going up again, and Mohr said the improvement is definitely good news for investors. “Average prices in Q1 2015 were probably the bottom, though prices could still be volatile over the next 18 months,” Mohr explained in a phone interview.
She predicts that WTI will recover to the $65 level by the fourth quarter of 2015, and noted, “I think the price is going to move up to $65 because there has been such a huge drop in cost of production. Margins are being squeezed for drillers and service providers, but also even wage rates would be moving down a lot in the industry, so the cost of drilling is going to move down a lot. So I think it is quite possible that it may come back, but I’m not expecting a big increase until later in the year or early next year.”
That said, she warned that a price increase could spur a drilling revival in the US, which could in turn check further price recovery. As the market tries to reach a balance between price increases and the production ramp ups that follow, Mohr sees the oil price moving back down a little, then back up, causing a “zig-zag” pattern in price recovery in the next several years.
New projects coming on-stream
Outside the US, new projects are already set to come online this year, and Mohr identifies a number of them in her report. Those in the Alberta oil sands include Husky Energy’s (TSX:HSE) Sunrise SAGD project, Pengrowth Energy’s (TSX:PGF,NYSE:PGH) Lindbergh SAGD project in the Cold Lake region, CNOOC’s (TSX:CNU,NYSE:CEO) Kinosis 1A SAGD project south of Fort McMurray, as well as a ramp up at Cenovus’ (TSX:CVE,NYSE:CVE) Foster Creek and the tail end of Imperial Oil’s (TSX:IMO,NYSEMKT:IMO) oil sands expansion projects.
As a result of those projects, export volumes from the area are expected to increase in 2015 by 100,000 to 150,000 barrels per day, but Mohr isn’t too worried about that growth. “Prior to the oil price downturn, SAGD bitumen projects in Alberta were quite cost competitive with the North Dakota Bakken and the Permian Basin shales in the US, though higher cost than ‘sweet spots’ in the Eagle Ford shale in southern Texas. Well-placed SAGD bitumen producers currently have mid-cycle break-even costs of US$40-50 (including a 9 percent after-tax return). Saskatchewan’s Bakken was on the bottom of the North American cost curve and should hold up well,” she states in her report.
Looking at how those producers and others are able to succeed in today’s difficult times, Mohr said it’s all about balance sheets — in other words, how much debt they had in their capital structure going into the downturn. Having attractive assets with low production costs are other keys to staying afloat.
It will certainly be interesting to watch those projects and the oil market as a whole moving forward. Mohr ended by mentioning that while not much M&A activity has happened yet, it could heat up in the future.
Securities Disclosure: I, Kristen Moran, hold no direct investment interest in any company mentioned in this article.