The bear is back. .Regardless of who is elected on May 29, falling world oil prices are threatening to undermine the aspirations of both of the main contenders as they both continue to dole out dollars on the campaign trail..World oil prices are down more than 15% this week as traders run for the exits over fears of a US recession, further interest rate hikes and the threat of a US government shutdown by June..North American benchmark West Texas Intermediate was down $3.50 US in New York Wednesday to $66.50, on top of a similar sized drop the day before, and was the biggest since the failure of two US banks and Credit Suisse in March..Likewise, UK Brent was down $3.38 a barrel to $72, its lowest in a year. Both watermarks are half of their 52-week highs of around $120 after Russia invaded Ukraine..Western Canadian Select — which accounts for about 70% of all oil revenues generated in the province — fared even worse. It was down more than 7% to $50.41. Canadian oil is priced in US dollars but sold in Canadian currency..It all adds up to a looming revenue crunch for whoever is elected Alberta’s premier this month. Every dollar up or down is worth about $220 million to the provincial treasury. That means Alberta is down almost $2 billion in the last week alone, an amount roughly equivalent to the government’s projected 2023 surplus, which is predicated on a West Texas price of $79..And given that UCP leader Danielle Smith is banking on $75 just to post even a modest surplus of $2.5 billion to balance the budget, some of her recent political promises — a $1 billion re-indexing the tax system and another $330 million for a Calgary arena — are already underwater. .The NDP hasn’t put a price tag on their political platform but, they’re already well over their heads. They’ve already promised to build a $200 million post-secondary campus in downtown Calgary, cap university tuition and embark on the biggest hiring spree of doctors, nurses, and teachers this province has ever seen. She’s even promised to pay for womens’ birth control pills..Not if oil prices stay below $75, they won’t..On the bright side, analysts such as Goldman Sachs are still predicting that crude could hit $100 by the end of the year. The recent price drops came despite a four million barrel draw in US inventories last week, according to the American Petroleum Institute and another 5.3 million the week before according the US government’s Energy Information Administration (EIA). .That means demand fundamentals remain strong. What’s happening is that oil markets are in a steep state of ‘backwardation’ — meaning future oil prices are substantially lower than they are today. In fact, the forward curve is the steepest its been in nearly 15 years. Which means it’s a technicals market dominated by traders..Counterintuitively, that may actually be good for oil prices in the longer term..According to Barron’s magazine, backwardation tends to encourage traders to buy oil, because they can sell near-term contracts and buy cheaper ones in the future. It can also convince oil producers not to increase production, because they're not getting paid as much to produce several months from now..As an oilman once said, the best cure for low oil prices is low oil prices.
The bear is back. .Regardless of who is elected on May 29, falling world oil prices are threatening to undermine the aspirations of both of the main contenders as they both continue to dole out dollars on the campaign trail..World oil prices are down more than 15% this week as traders run for the exits over fears of a US recession, further interest rate hikes and the threat of a US government shutdown by June..North American benchmark West Texas Intermediate was down $3.50 US in New York Wednesday to $66.50, on top of a similar sized drop the day before, and was the biggest since the failure of two US banks and Credit Suisse in March..Likewise, UK Brent was down $3.38 a barrel to $72, its lowest in a year. Both watermarks are half of their 52-week highs of around $120 after Russia invaded Ukraine..Western Canadian Select — which accounts for about 70% of all oil revenues generated in the province — fared even worse. It was down more than 7% to $50.41. Canadian oil is priced in US dollars but sold in Canadian currency..It all adds up to a looming revenue crunch for whoever is elected Alberta’s premier this month. Every dollar up or down is worth about $220 million to the provincial treasury. That means Alberta is down almost $2 billion in the last week alone, an amount roughly equivalent to the government’s projected 2023 surplus, which is predicated on a West Texas price of $79..And given that UCP leader Danielle Smith is banking on $75 just to post even a modest surplus of $2.5 billion to balance the budget, some of her recent political promises — a $1 billion re-indexing the tax system and another $330 million for a Calgary arena — are already underwater. .The NDP hasn’t put a price tag on their political platform but, they’re already well over their heads. They’ve already promised to build a $200 million post-secondary campus in downtown Calgary, cap university tuition and embark on the biggest hiring spree of doctors, nurses, and teachers this province has ever seen. She’s even promised to pay for womens’ birth control pills..Not if oil prices stay below $75, they won’t..On the bright side, analysts such as Goldman Sachs are still predicting that crude could hit $100 by the end of the year. The recent price drops came despite a four million barrel draw in US inventories last week, according to the American Petroleum Institute and another 5.3 million the week before according the US government’s Energy Information Administration (EIA). .That means demand fundamentals remain strong. What’s happening is that oil markets are in a steep state of ‘backwardation’ — meaning future oil prices are substantially lower than they are today. In fact, the forward curve is the steepest its been in nearly 15 years. Which means it’s a technicals market dominated by traders..Counterintuitively, that may actually be good for oil prices in the longer term..According to Barron’s magazine, backwardation tends to encourage traders to buy oil, because they can sell near-term contracts and buy cheaper ones in the future. It can also convince oil producers not to increase production, because they're not getting paid as much to produce several months from now..As an oilman once said, the best cure for low oil prices is low oil prices.
