Energy Market Overview - We expect a return to growth in energy demand to follow an economic recovery - Winter Energy Outlook 2009/2010

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Energy Market Overview - We expect a return to growth in energy demand to follow an economic recovery - Winter Energy Outlook 2009/2010 [PDF 316 KB]

Global energy demand has fallen considerably over the past year, with the slowdown of industries and energy conservation measures as major contributors. In general the largest economies have had the largest contractions. Looking forward, the expectation is for long-awaited economic growth to return this winter, which will likely lead to increased demand for energy. It is expected that the rise in prices from an increase in demand will be partially countered by the present build-up of energy stocks; oil and natural gas storage inventories are at high levels, and electric generation capacity is surplus to current requirements in many regions. These conditions are expected to contribute to relatively low and stable prices for Canadian energy consumers.

Crude Oil Market Overview - Seasonal demand increase and optimism surrounding economic growth will be key factors this winter

World crude oil prices have steadily risen since the energy price collapse near the end of 2008. After starting 2009 at around US$46 per barrel and dropping to as low as US$34 per barrel in the first quarter, prices rose on positive market sentiment and currently sit at about US$78 per barrel. Since bottoming out in the first quarter, prices have more than doubled, which, according to many analysts, has been driven in part by positive market sentiment.

Heading into the winter season, the market remains focussed on oil demand. Crude oil demand dropped significantly in 2009 led by countries in the Organization of Economic Co-operation and Development (OECD). The total expected decline in world crude oil demand during 2009 is estimated at approximately two per cent. Over the winter months, many analysts believe that the global economy is expected to strengthen and consequently demand for crude oil is expected to rise. However, it is not expected to return to pre-recession levels for some time and not over the winter months.

The Organization of Petroleum Exporting Countries (OPEC) has curtailed global supply by adhering to their production quotas during the first half of 2009. This has helped to keep already very high inventory levels from becoming unmanageable. However, recent reports suggest that OPEC compliance with its production quota is waning. Nevertheless, inventory levels in the main OECD markets grew over the first half of 2009 and continue to be high. Currently, they are near the top of the five-year range. The expectation is that these inventories will decline over the winter months as demand returns and if OPEC remains diligent in maintaining production quotas. High inventory levels, combined with greater OPEC spare production capacity, would suggest that any unforeseen supply disruptions over the winter months should be manageable.

Canada does not have much influence on world crude oil prices. Prices that Canadians pay this winter will be determined in large part by the strength of the global economic recovery. Continued oil price volatility can be expected as the volatility remains in the financial markets. Canadians can expect to see crude oil prices average between US$75 and US$80 per barrel over the winter.

Heating Oil Market Overview - Prices will continue to track crude oil prices and reflect high U.S. inventory levels

The North American winter heating season is just getting underway. Heating oil, also known as furnace oil, is a very similar product to diesel fuel and is used in about 10 per cent of Canadian homes. Sales of heating oil are concentrated in eastern Canada, with Ontario, Quebec and Atlantic Canada accounting for about 95 per cent of total sales. Although Ontario and Quebec account for about two-thirds of Canadian demand, the Atlantic region is most reliant on heating oil for space heating. In general, the price of heating oil closely tracks changes in the price of crude oil but conditions specific to heating oil markets can also impact prices.

The main heating oil market in the U.S. is along the Atlantic coast. Heating oil inventories in the U.S. can have an impact on prices in Canada. Currently, Atlantic coast heating oil inventories are very high and well above the top of the five-year average. With adequate inventories, markets are well supplied and prices are less likely to rise out of step with crude oil prices.

Natural Gas Market Overview - Storage surplus to keep gas prices low over the winter

The North American natural gas market should be well supplied over the winter. This summer, the market was characterized by weak demand while production declined only slightly despite shut ins and drilling reductions. As a result, natural gas storage is at record high levels. This surplus, combined with continued low demand, is likely to keep prices relatively low over the coming months.

In response to the lowest prices in more than seven years, most natural gas producers reduced drilling activity and shut in some gas production. However, North American production has exhibited only slight declines, largely because of strong production from emerging unconventional supply sources in the U.S. We expect North American production to continue its slight decline over the winter. The decline is expected to be more pronounced in Canada, which has not seen the same rapid growth in unconventional supply as the U.S. Finally, although global liquefied natural gas (LNG) supplies are abundant, LNG imports to North America are likely to be only slightly above last winter, as lower consumption will limit imports.

We expect natural gas demand to remain relatively weak over the next several months, mostly due to lower than normal industrial gas demand. Despite preliminary signs of an economic recovery, industrial gas use will still be below historical levels. Natural gas fired electric generation is expected to be slightly lower than last winter. Low gas prices encouraged more displacement of coal-fired generation by gas-fired generation over the summer. This trend could continue but will likely be less pronounced because of new coal and wind generation coming online in the U.S. and a return to normal hydroelectric generation levels in the Pacific Northwest.

Weather is particularly important in determining gas demand over the winter, with residential and commercial heating needs making up almost 50 per cent of consumption. However, forecasts for the winter have been mixed. Formation of warm waters in the Eastern equatorial Pacific, associated with a developing El Niño, suggest that much of the U.S. and Canada could see a warmer winter. However, other forecasts have called for cooler weather, especially in the high gas demand areas of the eastern continent. Overall, we expect total North American gas consumption to be slightly below to last winter and below historically normal levels.

The cushion of natural gas in storage and availability of LNG imports will likely keep gas prices relatively low over the winter. We expect prices to average between US$4.00 and US$5.50 per million British thermal units over the winter period. However, sustained cold weather or a strong economic recovery could push prices above that range.

Electricity Market Overview - Canadians can expect low wholesale prices and adequate supply this winter as electricity demand growth is expected to trail the economic recovery

Supply will be adequate to meet electricity demand across Canada for the winter season. Increased reserve margins (the difference between peak production capacity and expected peak demand requirements) have been driven by: increased generation capacity; decreased industrial demand; price-driven demand response; and energy efficiency programs.

On the supply side, installed capacity of natural gas-fired generation in Canada has increased by 50 per cent since 2007 and is expected to reach a total of 14 800 megawatts by year-end. Canada’s pursuit of wind power has doubled 2007 levels and is expected to surpass 3 700 megawatts by year-end, including British Columbia’s first wind farm. Ontario recently introduced a Feed-in-Tariff, the first of its kind in Canada, to stimulate renewable development by giving generators the certainty of selling into the grid for predetermined contract terms, including price. New builds, for both natural gas-fired and wind generation, have recently experienced financing difficulties related to reduced economic activity and lower energy prices. Despite this, most projects are still moving ahead.

Since the last Energy Outlook, several significant developments have also taken place with respect to nuclear generation in Canada. Decreased demand, coupled with a high percentage of wind generation, led the Independent Electric System Operator to call for lower production from Ontario’s nuclear plants. In addition, as of July future expansions in Ontario are either suspended or cancelled and refurbishments in Ontario and New Brunswick are delayed.

Electricity demand growth is expected to trail economic recovery in most jurisdictions. At the same time, system operators and planners maintain the need for more transmission reinforcement, which will create options for generation sourcing. Some jurisdictions are making progress on major projects to relieve bottlenecks (i.e. Ontario, Alberta and B.C.), although facility siting processes are proving to be time consuming.

Export and import data, from the first half of 2009, show that the economic slowdown is affecting Canada-U.S. electricity trade, which is down approximately 15 per cent from the previous three year average and nearly 30 per cent from record levels set last year. Canadian export revenues have dropped more than 50 per cent year-over-year. Although electricity trade in July was strong in terms of the amount of energy crossing the border, the associated revenue was far below that of recent years (an approximate 35 per cent decline in July revenue year-over-year) due to multi-year low prices in many export (and domestic) markets.

Quebec and Manitoba continue to export excess energy, which is far less in the winter due to high heating demands. Despite a year-over-year decrease of 25 per cent for the second quarter, Quebec leads the provinces in exports while Manitoba remains fairly constant as compared to previous years. British Columbia was a net-importer for most of this year, in part due to low precipitation and in part due to preserving water resources. It is also common industry practice to obtain higher export revenues by importing at off-peak and exporting at on-peak times, or later in the season when prices are more favourable.

Reduced demand across the continent, surplus capacity in Ontario, low natural gas prices and cool summer weather are all contributing to lower wholesale electricity prices. Lower prices in the Ontario wholesale market, relative to its American neighbours, encourages exports from that province. As a result, going forward we expect high exports and low imports over the fall shoulder season, followed by winter trade similar to recent years. Overall, market conditions suggest that supply will be adequate to meet consumer needs this winter.