The short-term outlook for crude is gloomy, with oil prices expected to fall by 11% to 15% by the end of 2015, but the long-term outlook is far more promising. There are a range of global factors driving crude prices, the most significant being demand for petroleum products as well as crude supply, with new technology such as fracking allowing oil companies to extract oil reserves once considered to be not commercially viable.
Issues specific to the Canadian oil industry are also affecting the short-term outlook for players in the patch, like growing U.S. oil production and ongoing infrastructure constraints. These issues will see short-term demand and prices soften.
What is the long-term outlook for crude?
The International Energy Agency expects global energy demand to grow by a third between now and 2035. According to the agency, the price of crude will rise to around $128 per barrel. This represents a 25% premium over the current price of West Texas Intermediate and 17% over the price of Brent, and will be a boon for oil explorers and producers, particularly those capable of boosting production while keeping costs low.
This demand will be primarily driven by rapid economic growth in emerging markets: first China, then India, and then the remainder of southeast Asia. China has already overtaken the U.S. to become the world’s largest net importer of crude; this growing demand, along with signs that industrial activity in China has stabilized, will continue to drive economic growth.
This highlights the need for Canadian crude producers to ensure that they are capable of reaching crucial Pacific Rim and East Asian energy markets. Demand from these markets will more than replace that lost from the continuing growth of U.S. light crude production.
In order to meet this demand, the IEA estimates that US$40 trillion needs to be invested in oil production, transportation, and refining infrastructure between now and 2035. Any failure to meet the required level of investment will push crude prices higher as demand starts to outstrip supply.
This bodes well not only for oil producers but also for those companies that provide critical industry infrastructure. This includes midstream companies such as Enbridge (TSX: ENB)(NYSE: ENB), TransCanada (TSX: TRP)(NYSE: TRP), and Pembina (TSX: PPL)(NYSE: PBA).
Interestingly, the IEA expects U.S. crude production to wane after 2035 as it hits a natural ceiling and then expects it to fade, reaffirming the importance of traditional sources of crude such as Saudi Arabia and Venezuela.
This also bodes well for growing long-term demand for Canadian crude.
The short-term outlook for players in the patch is rocky. Crude and natural gas prices are expected to soften and growing infrastructure bottlenecks are set to cause price differentials between Canadian crude blends and WTI to grow.
But the long-term outlook is extremely positive; not only will the price of crude grow on the back of stronger demand, but Canadian producers will also be able to access new key markets, including the Pacific Rim, Europe, and Asia. This will reduce reliance on the U.S. and allow many players in the patch to obtain higher prices for their crude and natural gas liquids production.
What does all of this mean for investors?
Clearly, it is not only crude producers in the patch who will benefit; all of the major midstream companies, particularly those with major westbound and U.S. Gulf Coast-bound pipelines, including Enbridge and TransCanada, will benefit.
Those companies who have already established a presence in Asian and European energy markets also stand to benefit, with their established relationships with refiners boosted by their ability to increase the volume of crude shipped. This includes Husky Energy (TSX: HSE), which has tapped into the gargantuan Chinese market through its Liwan gas project. Suncor (TSX: SU)(NYSE: SU) and Canadian Natural Resources (TSX: CNQ)(NYSE: CNQ) have Atlantic Ocean assets like Husky does, giving them access to European refineries and Brent pricing.
This growing demand and the investment required to grow crude supply will be a boon for oil service companies because of increased demand for drill rigs and other critical drilling and support infrastructure. This bodes well for companies such as Precision Drilling (TSX: PD), which will experience increased demand for their services and drill rigs as players in the patch seek to open new oil fields and develop existing assets to boost production.