Is now the time for Alberta to bank on higher oil prices?

Yahoo Finance Canada


Closeup of a bucketwheel reclaimer at oilsands mines of Fort McMurray, Alberta, Canada.
Closeup of a bucketwheel reclaimer at oilsands mines of Fort McMurray, Alberta, Canada.

With oil moving on from its worst week in 11 years, Canada’s main crude-producing province is counting on higher commodity prices lifting its energy-dominated economy. 

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The Alberta government’s 2020-21 budget calls for North American benchmark oil (CL=F) to average $58 through the year, before appreciating further to $63 in 2022-23. Resource revenue is projected to surge 68 per cent, from $5.1 billion 2020-21 to $8.5 billion in 2022-23. 

Alberta expects the discount paid for Canada’s main grade of crude versus the U.S. benchmark to be $19.10 per barrel in 2020-21, compared to $18.40 in the previous budget. However, the government expects that gap to narrow by 2022-23 as more pipeline capacity comes online.

Those are among the assumptions expected to fuel 2.5 per cent real GDP growth in the province in 2020, after a stagnant 2019.

The optimistic outlook for oil comes as fear of the coronavirus, formally known as COVID-19, wreaks havoc on commodity prices. China, where the outbreak has so far been widest spread, is the single largest importer of oil in the world. 

The price of West Texas Intermediate crude fell about five per cent on Friday, dipping below $45 per barrel. Oil prices have fallen more than 20 per cent since the beginning of the year.

“No one could have foreseen the recent dramatic fall in oil prices based on coronavirus fears,” a trio of CIBC economists wrote in a research note Friday. “If global fears ease, we would expect to see oil prices rebound as the year goes on.” 

While the Alberta government’s energy price assumptions were likely set weeks before the recent dramatic drop in oil prices, the persistent problem of the lack of takeaway capacity to move oil to global markets was well-known to the government. 

Alberta’s budget outlook anticipates that Enbridge’s (ENB.TO)(ENB) Line 3 will be online in early 2021, and the federal government-owned Trans Mountain expansion will be flowing by the end of 2022, followed by the completion of Keystone XL in early 2023.

This is the first budget for Premier Jason Kenney, who is among the loudest voices in a growing chorus of criticism over the sluggish pace of energy projects moving forward in the oil patch, as well as a broader sense of frustration over the state of the country’s energy sector. 

“This outlook is already subject to meaningful downside risk before the fiscal year has even begun... given what oil prices have done in recent weeks, and the fact that it also leans on a few contentious factors going right,” Bank of Montreal senior economist Robert Kavcic wrote after the budget’s release on Thursday. 

The budget document does contain some cautious notes, and even explores a “no market access” scenario under which the three expected pipelines are permanently cancelled. 

“Alberta relies heavily on revenue that is volatile and unpredictable,” the document states.“This revenue is linked to factors such as energy prices, equity markets, exchange and interest rates, geological events, global economic swings and weather, which are all uncertain and can fluctuate rapidly.”

RBC economist Ramya Muthukumaran notes Alberta’s forecast for 2.5 per cent growth in 2020 is well below the banks, at 1.7 per cent.

“Their optimistic [oil] price outlook, especially towards the end of the fiscal plan, is reason to be cautious about the viability of this plan,” she wrote on Friday.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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