GLJ’s April Pricing – A Shift in Dynamics

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The first quarter of 2020 has abruptly brought the oil industry to its knees; with historic occurrences resulting in the lowest prices since 2002.

Coronavirus Demand Impact

The global coronavirus pandemic is having major effects on markets as entire countries are put on lockdown, disallowing travel and stopping all non-essential business.  Refineries have largely dialed back their operations in response to the dramatic drop in consumption which has, in effect, eliminated demand for crude oil within the timespan of a few weeks. The coronavirus is estimated to affect about a quarter of the 100 million barrels per day of global oil demand at its peak, with overall demand losses estimated for the second half of the year in the range of 3 to 8 million barrels per day.

The Demise of OPEC+

In addition to the demand destruction, Russia and OPEC’s cooperation for continuing production cuts to sustain oil prices abruptly ended in March. This dissolution of their cooperation has opened the floodgates for oil production heading into April. In total, about 4 million barrels per day of additional production has been announced by Russia (300-500,000 bbl/d) and OPEC (Saudi Arabia – 2.6 Million barrels per day, UAE 1.0 MMbbl/d) above March production levels and these levels are expected to be sustained through to the end of 2020.

Egregious Oversupply

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Adding the demand destruction from the current pandemic to the increase in production announced by Russia and OPEC place estimates of oversupply in the range of 10 million barrels per day (with estimates increasing daily). To put this in perspective, the largest quarterly supply and demand imbalance for global oil over the past 10 years was approximately 2.5 million barrels per day, in either direction, with an imbalance over 2 MMBbl/day occurring only once in the past 5 years (plot below).

A Shift in Fundamentals

As a result of this expected supply glut and the anticipation that it will continue in the near term, prices are expected to remain lower, resulting in the decline of high cost production, bringing the overall average cost of the global oil supply lower.

With these trends in mind, GLJ has reduced our price forecast to reflect current and anticipated market pricing in the near term while reverting to a reduced long term price reflecting what we believe to be aligned with the long term global supply cost for oil.

GLJ’s April 2020 Forecast

GLJ’s recently released April price forecast has WTI and Edmonton Light long-term prices of 55.00 USD/bbl and 68.75 CAD/bbl, respectively (in real 2020 dollars), with Henry Hub and AECO long-term forecasts at 2.75 USD/MMBtu and 2.48 CAD/MMBtu, respectively (in real 2020 dollars).

Looking Ahead

Stay tuned for GLJ’s upcoming blog series on the North American natural gas markets shifting fundamentals and their anticipated impacts on both Canadian and North American natural gas prices.