Varcoe: Oil prices above $75 herald a new year with growing industry momentum

A key OPEC+ meeting on Tuesday kicks off the new year amid lofty expectations of continued improvement for Alberta’s largest industry in 2022 — and a boost for the provincial economy.

However, the Omicron variant of concern remains a wildcard that could temporarily disrupt global energy demand as more health restrictions are adopted.

Benchmark West Texas Intermediate (WTI) crude prices closed Monday at US$76.08 a barrel, just a day before the Organization of Petroleum Exporting Countries and its partners meet to talk about planned production increases for February.

The cartel previously agreed to ratchet up output by 400,000 barrels of oil per day (bpd) in the month as energy demand increases, but the group is expected to review the plan.

Despite escalating concerns about the impact of Omicron, analysts and Canadian industry executives believe OPEC+ will stick to its strategy, setting the table for robust prices this year.

“We are pretty comfortable we will see oil prices in the $70s throughout 2022, which provides a pretty highly profitable business,” Headwater Exploration president Jason Jaskela said in an interview Monday.

“OPEC has shown discipline on controlling the supply. You hear OPEC talk about supply and demand a lot more these days than in the past, so they are paying attention,” added Roger Tang, CEO of Deltastream Energy Corp. in Calgary.

Pumpjacks in an oilfield near Neftekamsk, in the Republic of Bashkortostan, Russia, on Thursday, Nov. 19, 2020.
Pumpjacks in an oilfield near Neftekamsk, in the Republic of Bashkortostan, Russia, on Thursday, Nov. 19, 2020. Photo by Andrey Rudakov/Bloomberg

After a bruising price war erupted in early 2020 between OPEC and Russia, the group has largely co-operated, controlling production levels while the global economy staged a recovery. Benchmark U.S. crude prices climbed up above $80 a barrel last fall, before dropping sharply in late November with the emergence of the Omicron COVID-19 variant.

Although the number of COVID cases is surging in Canada, the United States and other countries — and new government restrictions are being adopted to slow its spread — oil markets have regained some lost ground in the past two weeks, with WTI crude sailing past $70 a barrel.

“OPEC on a month-to-month basis will continue to increase production as long as these prices stay where they are,” said Al Salazar, vice-president of intelligence at energy analytics firm Enverus.

“Prices haven’t fallen, so why cut?”

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Supply disruptions from Libya and Nigeria have caused some tightness in oil market in recent weeks, offsetting recent U.S. output increases.

Salazar noted oil production in the United States jumped by about 400,000 bpd last month, reaching 11.8 million barrels per day before Christmas — its highest point since the spring of 2020.

He expects WTI crude prices to average in the low $70s this year, a profitable level for petroleum producers. Yet, it’s unclear if Omicron will further rattle energy demand in the coming months.

“Do not discount the fact that Omicron is not done and the COVID situation is still not past us yet,” Salazar cautioned.

For Canadian producers and oilfield service companies, the prospect of oil hovering around $70 a barrel is enticing, along with relatively strong prices expected for natural gas.

Companies are seeing higher cash flow levels and continue to focus on returning money to investors, while extinguishing debt.

“2021 was a good year and ‘22 will be even better,” said Doug Bartole, CEO of junior producer InPlay Oil Corp.

“We have to continue to battle headwinds — the ESG headwinds that keep coming our way and some government issues…but all in all, I’m pretty excited about what will happen here in the next year.”

As a private company, Deltastream will spend at least 30 per cent more this year than it did on exploration and development work in 2021, while boosting oil production by a similar amount, Tang said.

The Canadian Association of Energy Contractors (CAOEC) forecasts drilling activity to jump by 27 per cent this year, with nearly 6,500 oil and gas wells completed across the country — the highest number since 2018.

“The limiting factor this year will just be supply chains, manpower and equipment,” added Jaskela.

“It’s been seven years of downsizing and shrinking and right-sizing as organizations. I think 2022 is probably the first time in seven years where there has been some optimism.”

A pumpjack in the Permian Basin in Loving County, Texas.
A pumpjack in the Permian Basin in Loving County, Texas. Photo by REUTERS/Angus Mordant/File

The busy winter drilling season in Canada has had a strong start and Precision Drilling Corp. CEO Kevin Neveu expects to see activity levels 15 to 20 per cent above where they were a year ago.

He anticipates the upward trend to carry on through the rest of this year, as long as OPEC+ sticks to its game plan.

“I expect them to continue to show good discipline and ensure we have a moderate oil price in the $75 range,” Neveu said.

“It certainly appears to be a strong recovery year, both for activity and for rates. Barring any unforeseen big changes, it will be a pretty strong year for oil services.”

For Alberta, higher commodity prices should fuel economic expansion of 4.7 per cent this year, trailing only Saskatchewan, according to a recent RBC Economics forecast.

Strong cash flow levels for producers and more pipeline capacity for the year will support rising capital expenditures and increased production.

“We are expecting it to be a much better year for energy producers,” said RBC economist Carrie Freestone.

“Omicron is the wildcard, but there’s no reason to assume it will impact demand for energy products long term. So we’re still thinking it will be a very strong year for energy producers.”

Chris Varcoe is a Calgary Herald columnist.

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