Canadian Consumers to Benefit from Lower Energy Prices during the Summer - Energy Outlook Summer 2009

Canadian Consumers to Benefit from Lower Energy Prices during the Summer - Energy Outlook Summer 2009 [PDF 186 KB]

As a result of the 2008 energy price decline, Canadian consumers can expect to benefit from lower energy prices throughout the summer months. Crude oil prices are forecast to remain near current levels given weak global economic conditions. Reflecting this outlook for crude oil, and underutilized refining capacity, gasoline prices are expected to remain below levels seen last summer. Natural gas prices are expected to remain low over the summer period reflecting high storage inventories, ample supply, and weak demand. Electricity supply is projected to be adequate to meet summer demand. Where there are electricity wholesale markets, electricity is expected to trade at lower prices than last summer. Energy producers will continue to be affected by the low price environment over the summer, which in turn may lead to a tighter energy market in the medium to long term.

Crude Oil Market Overview - Struggling global economy and weak demand means US$50-$60 dollar oil

In 2008, the West Texas Intermediate (WTI) crude oil benchmark averaged about US$100 per barrel. After peaking at nearly $150 in July 2008, prices plummeted 70 per cent by year-end as the global economy entered recession and oil demand dropped significantly. In the first quarter of 2009, oil prices generally traded in the range of $40-$50 per barrel, but have since moved higher on rising market sentiment that the economy may be poised for recovery.

The Canadian and global oil markets will continue to be driven by evolving economic conditions in the U.S. and around the world. The global economy continues to struggle with the ongoing financial and credit crisis and fundamental weakness driven by wealth destruction and curtailed consumer spending. With the significant decline in crude oil demand, global crude oil stocks have been building, with inventories in the three major markets (U.S., Japan, and Europe) well above the five-year range. In the U.S., stocks are at the highest levels in several years. In an effort to curb the corresponding free-fall in oil prices, OPEC has committed to production cuts totalling 4.2 million barrels per day.

Oil prices could average between US$50-$60 per barrel over the summer. Improving economic conditions will likely mean oil will hold near the top of this range and could move higher, supported by OPEC production cuts, ongoing geopolitical risks and higher seasonal demand. On the other hand, if economic conditions deteriorate, prices are likely to move toward the lower end of the range as the market focuses on high inventories and very weak demand.

Gasoline Market Overview - Relatively low summer prices mirror crude oil market

The U.S. Memorial Day weekend in late May marks the beginning of the summer driving season and an increase in gasoline demand in Canada. In general, the price of gasoline closely tracks changes in the price of crude oil, but conditions specific to gasoline markets can also impact prices.

Like crude oil, gasoline inventories in the U.S. can have an impact on prices in Canada. Currently, U.S. gasoline inventories are below the five-year average and trending lower, which is one reason for the recent rise in gasoline prices across Canada. Gasoline prices are typically a few cents per litre higher in the summer because of increased demand. It is, however, unclear the extent to which demand will increase with the U.S. and Canada still in recession.

Natural Gas Market Overview - Continued low prices through summer months

In contrast to the record highs in the summer of 2008, natural gas prices are expected to be low through the summer season. Weak demand, ample supplies of domestic gas, growing liquefied natural gas (LNG) imports, and less gas needed to refill storage inventories will likely put downward pressure on North American gas prices.

In response to weak demand and low prices, producers reduced drilling across North America starting in late 2008. Therefore, while North American gas production had been growing in 2008 and early 2009 on the back of strong U.S. activity, production is expected to be falling by mid-year 2009, albeit remaining close to historically high levels. LNG imports will be higher than in 2008 due to greater supply availability and lower demand in the traditional LNG markets of Asia and Europe.

Unconventional sources of natural gas in North America continue to increase their share of gas supply in the market, in particular shale gas. However, Canadian sources of shale gas are still in early development and will not add significant production in the short term. A global surplus of gas supply may find its way into North America in the form of LNG, further increasing supplies to the market.

Natural gas demand will remain weak over the summer period as the global economic downturn reduces industrial demand. Furthermore, storage levels are currently almost 600 billion cubic feet higher than last year, suggesting that North America will be amply supplied with gas in the short-term. Additional demand may develop from the replacement of some coal fuelled electricity generation with natural gas, although the likelihood of this providing significant support to the overall market remains uncertain.

Given the oversupply situation, we expect prices to average between US$3.20 and US$4.20 per million British thermal units (MMBtu) over the summer. It is important to note that many factors exert upward or downward pressure on prices. Hot weather, economic growth, and demand surges can push prices higher. Mild weather, a further weakening of the global economy, and continued high storage levels will exert downward pressure on price and our outlook is biased to the low end given the anticipated economic conditions over the summer.

Electricity Market Overview - Adequate electricity supply to meet summer demand across Canada

New power generation has come on-line in several jurisdictions including the Atlantic Provinces, Quebec, Ontario, and Alberta. Additionally, transmission capacity has been expanded between Ontario and Quebec and between New Brunswick and the U.S. This increased generation and transmission capacity combined with weaker economic conditions, which result in flat or slightly decreasing demand, suggest that supply should be more than adequate. The bottom line for the average Canadian consumer is that, aside from extreme weather conditions and unforeseen outages, there should be no supply interruptions.

Canadian power markets, with the exception of Ontario, experience peak demand in the winter months; thus there tends to be larger amounts available for export in the summer period. Canadian-American electricity trade volumes reached record levels in the summer months of 2007, only to be surpassed in 2008. Records were set in exports, imports and total trade. Annual 2008 net exports of 32.2 terawatt hours were far above the five-year average of 23 terawatt hours. The primary reasons for the record export performance were heavy precipitation levels and additional installed capacity on the supply side, and conservation and economic factors on the demand side. High export volumes are an indicator of adequate supply because exports are surplus to domestic demand.

Given the healthy supply situation, an increase in net trade with the U.S. might be expected again this summer. However, in view of the weak prices in the U.S., and more recent indications of declining exports into New England and the Midwest U.S., such an increase is less certain.

Wind facilities continued to grow rapidly across the country in 2008 resulting in a 34 per cent increase in installed capacity, Canada's second best year ever in terms of installing new wind generation. Although Canada is expected to surpass the 3 000 megawatt mark in 2009, the impetus seems to be slowing somewhat, as the impact of weaker wholesale markets in combination with current global economic conditions is making it difficult for some wind developers to put together favourable wind power development arrangements.

For the vast majority of Canadians, electricity rates are decided by provincial and territorial regulators on a cost of service basis, which includes capital-related costs, operating costs and the cost of fuel. Normally such rates are less volatile than commodity (fuel) prices because of the other costs. Given the current rate decisions by regulators, it appears as if consumers in all provinces except Alberta and Newfoundland-Labrador will be paying somewhat higher rates this summer compared with 2008. In Alberta, prices are expected to be lower due to the latest monthly downward adjustment of the regulated rate option. In Newfoundland-Labrador on the other hand, their principal utility has filed an updated fuel price projection which, effective 1 July 2009, is expected to result in a decrease in electricity rates for most electricity consumers.