September 17, 2015
BloombergThe Syncrude upgrader plant of the company's mine stands at dusk in the Athabasca Oil Sands near Fort McMurray, Alberta. Low prices for oil for the long term is not good news for Canada's oil patch.
A glut of crude may keep oil prices low for the next 15 years, according to Goldman Sachs Group Inc.
There’s less than a 50 per cent chance that prices will drop to US$20 a barrel, most likely when refineries shut in October or March for maintenance, Jeffrey Currie, head of commodities research at the bank, said in an interview in Lake Louise, Alberta. Goldman’s long-term forecast for crude is at US$50 a barrel, he said.
Goldman cut its crude forecasts earlier this month, saying the global surplus of oil is bigger than it previously thought and that failure to reduce production fast enough may require prices to fall near US$20 a barrel to clear the glut. Prices may touch that level when stockpiles are filled to capacity, forcing producers in some areas to cut output, Currie said Wednesday.
“When we think of the longer term oil price, yes we put it at US$50 a barrel,” he said. “However the risks are to the downside given what’s happening in the other commodity markets and the macro markets more broadly.”
Even at $50 a barrel, such a low price for such an extended period of time could have a major impact on development of Canada’s oilsands, which make up 90% of the country’s oil reserves.
Oilsands producers need US$100 a barrel oil to build a new mining project, US$60 oil to build a new Steam Assisted Gravity Drainage project and US$40 to expand an existing SAGD project.
Here’s a Canadian Energy Research Institute look at costs for new projects in a 2014 study.
Lower iron ore, copper and steel prices as well as weaker currencies in commodity-producing countries have reduced costs for oil companies, according to Currie. The world is shifting from an “investment phase” of a 30-year commodity cycle to an “exploitation phase,” with shale fields as an important source of output, he said.
U.S. benchmark West Texas Intermediate crude futures were 1.3 per cent lower at US$46.52 a barrel on the New York Mercantile Exchange at 11:24 a.m. London time. Prices are down about 13 per cent this year and have plunged more than 50 per cent over the past 12 months.
Fed Rates
The U.S. Federal Reserve may “leave a lot of negative uncertainty in emerging markets,” potentially affecting oil demand, if it doesn’t raise rates at its meeting this week, Currie said.
The Federal Open Market Committee will release its policy statement along with quarterly economic projections Thursday in Washington. It will weigh the impact on the U.S. outlook from slowing growth overseas and falling stock prices, as committee members determine whether to end almost seven years of near-zero interest rates. Economists are close to evenly divided on the outcome, with 59 of 113 surveyed by Bloomberg expecting the Fed to stand pat.
While a “dovish hike” in interest rates would reduce uncertainty in emerging markets, any adjustment would be a “relatively small story” for crude, Currie said.
With files from Reuters
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