The oil price came under pressure again Monday as
J.P. Morgan (
NYSE: JPM,
Stock Forum) cut its oil price forecast for 2015, saying prices could go as low as $38 a barrel as early as March.
But one Canadian analyst predicts that prices are bound to come back eventually since production costs in the U.S. shale industry are north of US$100 a barrel, a level that will prevent key players in that sector from fueling production growth by taking on more debt.
In a speech to the Cambridge House International Investment conference in Vancouver, Keith Schaefer pointed out that two thirds of the revenue in the shale industry is generated by natural gas, with only one third coming from oil production.
Meanwhile, Schaefer is warning about the impact on Canadian natural gas producers of a massive surge in production from the Marcellus formation, which covers 104,000 square miles and stretches across Pennsylvania and West Virginia, into southeast Ohio and upstate New York.
“This is likely to put severe pressure on Canadian gas condensate producers,’’ said Schaefer, who publishes the Oil and Gas Investments Bulletin.
Marcellus is the “granddaddy” of all natural gas plays. It is currently producing at a rate of 7.8 billion cubic feet per day, marking an increase of 10% from 2013. “The production increases are stunning,’’ he said.
In a recent report, Oil & Gas Bulletin said Canadian natural gas prices could drop by well over half in 2015 as new pipelines allow very cheap Marcellus gas to flood North America, while displacing Canadian gas in Ontario, the Midwest and even the U.S. west coast.
According to a report by Macquarie Securities, which was published by Oil & Gas Bulletin, this could force Canadians to accept huge discounts in their gas prices as they try to find anyone willing to take their production.
So what does this mean for investors?
“To make money, you are going to have to be patient,’’ said Schaefer, adding that investors may have to look to the edges of the energy industry into areas like ethanol.
Casey Research’s chief energy investment strategist Marin Katusa is no more optimistic about the near term prospects for oil. “We are no-where near a full bottom from a historical perspective,” he told the Cambridge House conference on Monday.
However, Katusa said it is a myth to suggest that the low price of oil is going to shut down the Canadian oil sands. It is the new producers that are going to have problems, he said.
“
Teck Resources Ltd. (
TSX: TCK.B,
Stock Forum), for one, is going to have big problems with their production coming on,’’ Katusa said.
Teck has a 100% interest in the Frontier project, a proposed truck-and-shovel oil sands mine located about 100 kilometres north of Fort McMurray, Alberta. It also has a 20% interest in the Fort Hills Energy Ltd. Partnership, which owns the Fort Hills oil sands project. It is also located north of Fort McMurray.
The balance is held by Total E&P Canada Ltd. (39.2%) and the remaining (40.8%) held by project operator
Suncor Energy (
TSX: T.SU,
Stock Forum).