Why Sproule and Deloitte have different views on future WCS oil price recovery

Image: Joey Podlubny/JWN

Pending OPEC and non-OPEC production cuts have pushed international oil prices higher into the New Year and local crude indexes, such as Western Canadian Select (WCS), have followed in tow.

Both the latest Sproule and Deloitte forecasts show WCS oil averaging C$53/bbl in 2017 but, after that, things get interesting.

Sproule expects WCS to leap to almost C$62/bbl as an average for 2018, while Deloitte maintains a more modest view of WCS, averaging C$55/bbl in 2018.

The rapid climb in WCS prices continues into 2019 in Sproule's forecast, averaging almost C$65/bbl for the year, while Deloitte expects WCS to average just C$58/bbl in 2019.

“What you're seeing there is a different view on the timing of the recovery,” says Sproule vice-president and partner Christoffer Mylde.

He cites world oil demand growth as the driver for Sproule's more optimistic oil price recovery.

“The demand side continues to build at between 1 million and 1.5 million barrels every year and that's been a very consistent showing throughout the downturn as well as over the last 20 years,” Mylde says.

“Assuming that a significant portion of the cuts announced by OPEC and some of the non-OPEC countries are realized...you would expect that to pull in some of the more peripheral projects such as the oilsands and some of the deep water projects that will require a higher price.”

Andrew Botterill, partner in Deloitte's REA group, says his consultancy's flatter oil price recovery is more in line with oil futures.

“Futures for oil pricing tend to be a little flatter right now. That's why show such a slow growth,” Botterill says.

“We have a flat oil price and a slowly recovering exchange rate. [Sproule] have a quick recovery and exchange rate.”

But Deloitte's slow and steady growth in WCS prices eventually overtakes Sproule's WCS prices in 2021/2022.

Even more interesting is that Sproule continues to see a discount for WCS relative to WTI over the duration of its forecast period while Deloitte expects WCS and WTI prices to approach parity by 2022.

Explaining Sproule's position, Mylde says: “We see WCS attracting a discount of US$13 to US$15 (C$17 to C$19) to WTI in coming years, reflecting a longer term differential based on crude quality and transportation costs.

"We do not see a return to the higher and more volatile offsets that we observed in 2012 and 2013, when the market was readjusting to the significant volumes of new shale production in the US. New pipelines, crude by rail and the US repeal of its crude export ban will gradually continue to mitigate bottlenecks in the North American crude market.”

Deloitte's view of currency exchange rates accounts for its forecast of a narrowing heavy/light oil differential.

“Our differential is forecast to disappear in 2021/22 because of the exchange rate,” Botterill says.

“We're spending more time looking at exchange rates now than we ever did in the past as a key input. We've seen a lot of really dynamic changes in exchange rates over the last few years and, as the exchange rate moves, Canadian and U.S. oil prices start to dance with each other a little bit.”

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