Uncertainty rattles global crude prices, puts spotlight on Alberta oil revenues

The volatility of international oil markets hit home again earlier this week, as crude prices tumbled to their lowest levels in more than a year.

Just a couple of weeks ago, West Texas Intermediate (WTI) prices North America's benchmark for crude oil were around $75 US a barrel. This week, prices skidded to around $66 US a barrel under the weight of ongoing market uncertainty.

"I think it's fair at this stage to call it an utter bloodbath," Rory Johnston, a Canadian energy analyst and founder of oil market research company Commodity Context, said on Tuesday, referring to the recent price plunge.

"There are both fundamentally justified reasons for concern, but at the same time, I think that the voraciousness and pace of the price declines that we've seen are not at all justified by the pace or change of the fundamentals that we're seeing."

Some market watchers in Alberta believe the market's volatility is only a short-term issue. Johnston suspects prices will rebound in the coming weeks to a month. On Wednesday morning, the WTI price climbed back over $67 US a barrel, up nearly three per cent.

"I think the gradual market weakening is longer-term conditional on OPEC choices for next year but I continue to think this sharp selling pressure is short-lived and should reverse itself," said Johnston.

Analysts point to a number of reasons for the decline, including a slowdown in Chinese oil demand as electric vehicle sales grow, the producer group OPEC cutting its forecast for global oil demand growth marking its second-consecutive downward revision and also recession concerns.

The weaker outlook further underscores the challenge faced by OPEC+, which comprises the Organization of the Petroleum Exporting Countries and allies such as Russia, in balancing the market.

Last week, OPEC+ delayed a plan to start pumping more oil after prices hit the lowest in 2024.

'Declines could get quickly reversed,' economist says

Those who are examining the market say it's too early to panic about prices.

Mark Parsons, chief economist with ATB Financial, says he expects oil prices to rebound slightly and for the WTI to hover around the mid-$70 range again heading into next year.

"It's important to keep in mind that this has really just happened in the last week or so that we've had some weakness, and we definitely can go through periods where these declines could get quickly reversed. So you have to look at the longer-term trend," Parsons told CBC News.

"We still see WTI pricing sort of in the mid-$70s over longer periods. You're going to have this short-term volatility, but it'll tend to average out. And the reason for that is we still expect, you know, we have these OPEC production cuts still in play. They're going to be unwinding next year."

OPEC+ has implemented a series of output cuts since late 2022 to support the market, most of which are in place until the end of 2025.

The group was due to start unwinding the most recent layer of cuts of 2.2 million bpd(barrels per day) from October, but decided last week to delay the plan for two months after oil prices slumped.

Richard Masson, an executive fellow with the University of Calgary's School of Public Policy and former head of the Alberta Petroleum Marketing Commission, says it's possible oil prices could be soft in the fall.

"We've come out of the big driving season in North America and some of the other parts of the world," said Masson.

"The amount of oil production hasn't been going up what people expect, OPEC+ is trying to add more barrels to the market. And so the question really becomes, are they going to get it right in terms of when they bring those extra barrels back on production, or will they do it too quickly and soften prices further?"

Masson said it seems as though OPEC+ is trying to manage the price of oil to "keep it at least in the $70 US range."

"But we'll have to wait and see how it turns out," he said.

Keeping an eye on the market for the next couple of weeks will be important for Alberta, one analyst believes.

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"This is obviously a significant speed bump in the road," said Al Salazar, energy columnist for CBC Radio's the Calgary Eyeopener and head of macro oil and gas research at Enverus Intelligence Research, on Wednesday morning.

"When it comes to royalties, this doesn't help [Alberta], but I think it's a little bit too early for [oil] producers to panic."

Implications for Alberta's budget

Whether the price slide will be short-lived or not, the situation brings into sharp focus the importance of oil to Alberta's economy and government coffers, as the province continues a reliance on oil revenues to cover its spending.

At the end of August, the province's first-quarter fiscal update showed the Alberta government expects the average WTI price of oil to be $76.50 US, up $2.50 US a barrel than what was originally forecast in the budget.

Because Alberta's economy is oil-intensive, Parsons expects the province will be watching the market closely.

"Obviously royalties are extremely sensitive to any changes in oil prices, but that's for a full year of oil prices being below the forecast. Year-to-date, oil prices are still pretty decent," said Parsons.

"It's definitely something to watch. Producers are obviously taking a look as well, although I would say that Alberta oil and gas investment is more resilient to oil price declines."

In an email statement to CBC News, the press secretary for Alberta's Ministry of Treasury Board and Finance, Justin Brattinga, said the government is conservative with its estimates.

"While oil is currently under our projection, the price is often subject to ebbs and flows. That is why our Q1 results had cautious optimism. Oil production remains strong, with drilling activity increasing in August and energy exports increasing throughout the summer," said Brattinga.

"However, this is why we are developing a plan to increase the Alberta Heritage Savings Trust Fund to $250 billion by 2050, so that the investment income from the fund may one day replace resource revenues to fund the services Albertans deserve."

'Oil prices go up and oil prices go down,' says business council member

Scott Crockatt, a vice president at the Business Council of Alberta, says he remains optimistic about the energy business, particularly Alberta's, but he believes "we should settle in for some challenging environment over the next little while."

"When you look at the factors that could increase demand and support prices there aren't a lot of reasons to assume that things are going to shoot up in the near term," he said, adding weak global demand forecasts are influenced by an amalgamation of factors that influence the market.

For him, the price slide points to what a challenge budget crafting can be in a province like Alberta. Crockatt says if oil prices remain around $10 lower than what's been budgeted for, it could limit the provincial government's spending flexibility.

"With every one dollar representing about a $630-million drop in terms of provincial revenues, we could be looking at a shortfall in the multiple billions compared to where we thought royalties would come in if they stayed at this price level for an entire year, which is a big if."

Crockatt nonetheless echoed the sentiment expressed by other analysts: "Now's not the time to panic."

"Oil prices go up and oil prices go down, and this is why we have to have steel in our spine as Albertans," he said.

"When there's a little bit less money in the oil and gas business, that'll have a knock-on implication to the overall broader economy, but I think it's worth stressing that these mid-60 prices are really survivable."