Cheap gas is nice but low oil prices are bad for Alberta
Concerns over reduced global demand due to fallout from the coronavirus outbreak have helped push benchmark oil prices down.
By ATB Economics 5 March 2020 1 min read
Alberta’s oil production reached just over 3.6 million barrels per day in January. As a result, when the price of a barrel changes, millions of dollars per day are at stake.
Producers negotiate a wide range of prices for each barrel, but global and regional benchmarks provide a general sense of how those prices change over time.
Oil prices started the year relatively strong with front-month futures contracts for West Texas Intermediate (WTI) crude fetching over 60 US dollars per barrel on the New York Mercantile Exchange. The benchmark for Alberta’s heavy crude—Western Canadian Select (WCS)—was in the high 30s.
Fast forward to March and concerns over reduced global demand due to fallout from the coronavirus outbreak have helped push benchmark prices down under $50 for WTI and into the low 30s for WCS. Meanwhile, the data analysis firm IHS Markit is forecasting that global oil demand will be down by 3.8 million barrels per day in the first quarter of the year.
The drop in demand and the accompanying price slide should be temporary. But temporary is a relative term and the disruption caused by the coronavirus could go on for a long time and keep oil prices soft deep into the year.
With demand ebbing, the need to keep global supply in check is even more pressing than usual. The current situation has OPEC calling for an additional voluntary production cut of 1.5 million barrels per day but Russia has not yet decided if it is on board. In any case, it will be up to the markets to decide if the cuts are sufficient to keep prices from falling.
Oil prices are notoriously difficult to predict, and while lower prices at the gas station are a welcome respite for consumers, the current downward trend does not bode well for Alberta’s economy.