Do you remember the oil price forecasts I published back in January for 2012 ? 6 months later oil just hit a record 8 months low falling below $80 WTI. Not surprising given all the factors in play (Europe, Global Economy, oversupplied market). I have always hoped for prices to bottom in the $85-$95 per barrel, we are currently below $80 and I don’t think we have bottomed. It hurts even more for our Canadian oil producers which sell at a discount to WTI and as a result are starting to cut spending.
Whitecap Resources and Bellatrix Exploration cut their spending for 2012 and I expect other companies to follow the longer this environment persists. Only Encana stands in stark contrast by increasing its spending $600 million! If the price of oil continues its slide, US producers will be next in line to cut spending. Make no mistake, unconventional oil does not breakeven at $20 per barrel, it takes upwards of $68 to make a 15% return in the Bakken. All of the projected billions in spending on Ultra Deep Water projects, oilsands growth and other unconventional targets will be cut as well.
This is not the end of the world; this is a reflection of the state of the global economy. Keep in mind that lower oil prices translate into less money paid at the pump. According to the chief U.S. economist at High Frequency Economics, Americans spent an average $551-billion (U.S.) a month, on an annualized basis, at the pumps in the first quarter of the year. That should fall to $531-billion in the second quarter and $500-billion in the third. This is a lot of money that will be spent elsewhere in the economy giving the GDP a small boost.
For me, it’s time to be patient keeping watch on the international producers that capture Brent pricing. This might also be an opportunity to be nimble with star junior oil producers because when the market comes back, these players will bounce back fast and hard. When will that happen? I don’t know but I do know that while low prices provide a boost to the global economy, very low oil prices will negatively impact the supply situation. This is no time to panic in my opinion, this too shall pass.
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Have a Great Weekend!