Texas deep freeze the latest jolt as volatile oil markets recover from 2020

It was only last spring that the price of a barrel of oil plunged below zero amidst tumbling fuel demand brought on by a global pandemic.

What a difference 10 months can make. 

Fast forward to this February and there's talk about how high prices might climb, with a reputable Wall Street investment bank recently suggesting they could again end up on a path to $100 US a barrel.

It's still a volatile time for the industry, with energy markets roiled again this week by a historic cold snap that plunged the Texas oil industry into a deep freeze. 

And as the North American benchmark price temporarily climbed over $60 US in recent days, the sector continues to navigate, among other things, the uncertainties of COVID-19 and what the economic recovery will look like.

"We're in for a choppy ride on crude prices for the next couple years," said Rory Johnston, managing director and market economist at Price Street in Toronto.

Still, the last few months have seen oil prices climb back from steep declines caused by weakness in fuel demand and an international oil price war last spring.

Since November, markets have rallied with vaccine rollouts, and as governments and central banks deploy stimulus packages aimed at lifting economic activity.

Reuters market analyst John Kemp wrote Friday that market rebalancing has been completed "earlier than seemed likely a few months ago," due in part to a strong recovery in manufacturing and extra output cuts by OPEC+.

"With the exception of jet [fuel], most other indicators of production, consumption and inventories should return to normal by the end of the first quarter, rather than the end of the second, as seemed likely last autumn," he wrote.

In mid-November, West Texas Intermediate (WTI) crude clocked in below $42 US a barrel.

This week, prices climbed over $61 US — to their highest level in 13 months — as a punishing cold snap hit key oil-producing areas in Texas, with refiners in the state halting about a fifth of the nation's oil processing.

The refinery shutdowns will depress prices for U.S. crude oil, Paul Sankey of Sankey Research, an independent energy researcher, said in a note. He forecast "heavy pressure on U.S. crude prices from returning supply into no demand from a major refining outage that will last 2-3 weeks."

On Friday, WTI oil prices closed at $59.26 US a barrel, down $1.27.

But there has been talk this month about how high oil prices might eventually rise.

Perhaps the most optimistic prediction says crude prices could even climb toward triple digits as the impact of the pandemic subsides. Those are prices not seen since 2014.

As the Financial Times reported, such a surge is "predicated on the belief that fiscal stimulus will boost consumption just as investment in new production has been sucked out of the industry." 

Some market watchers think it's too early to make that kind of forecast, while others simply believe oil doesn't have another "supercycle" left in it.

Judith Dwarkin, chief economist at Enverus, an energy data analytics firm, said the market fundamentals support prices at or near the levels seen this week.

"Recovering demand and soft supply is a recipe for better prices," she wrote in a post published Monday. "Market sentiment has turned the corner."

But she also cautioned "while the worst of the devastation wrought by the pandemic on the global economy and oil market may be behind us, wolves still hover at the edge of the forest."

In the near term, she is anticipating a surge in global oil consumption later this year as vaccinations pick up and economies regain momentum. 

"The caveats on this outlook is that the demand recovery can't falter, which hinges a great deal on the success of vaccination programs around the world," she said in an interview.

"As well, we wouldn't want to see any unexpected bearish developments on the supply side."

That includes anything that might lead Iran to unleash some of its fettered barrels onto the market without a new deal in place with the U.S. on its nuclear program.

Meanwhile, questions still loom over the future appetite for fossil fuels amidst widening efforts to expand green energy, slash carbon emissions and tackle climate change. 

Rystad Energy said this week that lower emission targets and demand for cleaner energy "have significantly impacted the long-term production outlook" for the world's largest oil companies.

For now, however, higher prices should be good news for Alberta's UCP government as it prepares its provincial budget for Feb. 25.  

Charles St-Arnaud, chief economist with Alberta Central, the central banking facility for credit unions in the province, wrote in a brief on Friday that the value of oil production in Alberta in January 2021 was back to its pre-COVID level at an estimated $5.6 billion.

What many Albertans will be watching for is whether higher oil prices will unlock the spending that also creates more work in a sector that's seen thousands of layoffs.

Analyst Kevin Birn of IHS Markit said higher prices should start setting the stage for Canadian oil sector to begin rebuilding their balance sheets by paying down debt and re-establishing any dividends that may have been cut.

It could also lead to increases in capital spending, though Birn cautioned that step could take some time.

"Volatility really impairs the ability to make investment decisions and we're going through a particularly volatile period," Birn said.

"Companies are probably still going to be hesitant to make large-scale capital investments — the larger the project, the greater the hesitation."