Calgary oil analyst offers dim outlook for 2015

Veteran oil forecaster Martin King expects crude prices to fall further before a gradual increase later this year.

The FirstEnergy Capital commodity analyst provided an update on his forecast for oil this year during a presentation in downtown Calgary on Tuesday morning.

He said heexpects the price of crude to average $54.50 USa barrel in 2015 and $67.20 in 2016.

"I don't expect an applause," he joked as he finished his presentation.

King painted a bleak picture for oil producers, citingmassive oversupply of oil around the globe. Onshore and offshore storage capacity is filling up and demand is subdued, especially in Asia, he said.

• Watch video of Martin King explaining why oil prices will take a long time to recover.

At the same time, oil production keeps rising. OPEC is holding the line with output and production is expected to increase in the U.S.

"North America will blink first," said King.

Drilling activity in Canada and the U.S. is beginning to slow, which should cause oil production to start falling in 2016, he said.

The price projections for the next few years are worrisome for Alberta's energy sector, already experiencing job cuts at several companies.

"It's fairlysombre, there are a lot of negative faces out there. Certainly no one is smiling in the industry right now," said King."They are getting a better feel for the fact that prices will not recover as quickly as they had hoped."

No one is smiling in the industry right now- Martin King, FirstEnergy Capital

Is $30 the bottom?

A gradual rebound in crude oil prices is expected by many industry watchers. But first, prices will have to bottom out.

That is expected to happen in the next few months.

"Of course, it could get lower. In fact, the options market in crude oil suggests that we could see prices as low as $30," saidAdam Siemenski, administrator with the U.S. Energy Information Administration, speaking to CBC News in Calgary.

"Nobody really has a good handle on where all this is going. There are too many moving parts."

Impact of cheap fuel

There is discussion among experts about whether oil demand will increase because of low fuel prices at the pumps. The belief is that cheap gas and diesel should lead to increased consumption from drivers and businesses. Expertssuggestthis increase in demand will not have a significant impact on the price of oil and may only be experienced next year.

"I think that is notwhat is going to pull us out of this price slump," said MichaelWittner, managing director and global headof oil research withSocitGnrale. "I think itwill be a lagged response. A little bit more growth in 2016."

• Watch Michael Wittnerdiscuss why there is lukewarm demand for oil around the world.

Service costs

Oil companies are experiencing some cost savings in their operations. With the energy sector under duress, expenses are going down, according to Edward Morse, the global head of commodities withCitiResearch.

"We are already seeing, effectively, a 25 per cent reduction in overall costs of services," said Morse about the U.S. shale oil industry.

He said there is a decrease in the service sector costs in the oil sands, although he did not have exact figures.

"The trajectory is clearly downward and it will accelerate downward in the next year. So this should reduce the costs that need to be incurred at some of the most expensive projects in Canada."