Calgary energy veteran says oil downturn is over, but not everyone agrees

This story was originally published Oct. 5.

Less than a week after OPEC lifted the spirits of the oil world with thesuggestion of a possibleNovember production cut, there appears to be actual optimism in the air in Alberta.

At a packed breakfastat the Calgary Petroleum Club, the wood-panelled heart of the oilpatch, veteran forecaster Martin King said the oil glut ended a few months ago and prices will begin their slow climb upwardwith the emphasis on slow.

There were a couple fist pumps at the pronouncement, but some skepticism too. There have been false starts to theoil price recovery and King himself was expecting oil to perform betterin 2016 than it has.

Here is King's case: Oil supply and demand came back into balance in the second quarter of the year and has stayed in balance even as Canadian production came back online after the Fort McMurray fires. Apart from price signals, King said inventories have remained fairly steady, which itself shows that supply does not exceed demand.

If OPEC does pull off some sort of cuts, that should help to accelerate the process and you should see a lifting of prices even faster.- Martin King, GMP FirstEnergy

King pointed out that demand is still strong, and that supply is down from many countries, including the U.S., so far thisyear.

"Add all of this together and the market should be tilting its way to undersupply," said King."This is even before what potentially could be a move by OPEC."

King gives OPEC a 50-50 chance of actually coming to an agreement next month in Vienna.

"We don't necessarily need that to see the market tighten up;certainly it's going to help to a certain degree, if they pull it off."

Oilpatch desperately needs a boost

There is no question that the energy sector is in dire need of price improvements. The unemployment rate in Calgary isnine per cent andthe office vacancy rate is nearing 25 per cent.

Brian Schmidt, the chief executive of Tamarack Valley Energy, a junior oil player, expects this fall to be a time of reckoning for many in the industry. Those companies lucky or smart enough to have hedged or pre-sold their production are seeing those hedges come to an end.

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Banks are about to start their semi-annual review of credit lines and loans.

"Banks would have looked at the problem companies were having in that May time frame and said, 'Listen, you have to sell some assets, straighten out your balance sheet. You have to do these things or we won't renew your loans a second time,'" said Schmidt.

"So companies are frantically trying to meet the commitments lenders have put in place. Some may not be able to do that."

Schmidt expects more companies to become insolvent or seek bankruptcy protection.

Service sector decimated

The oil services sector is well aware of the fragility of its finances. Mark Salkeld, the presidentof the Petroleum Services Association of Canada, said that his association had 235 members representing 60,000 employees before the crash two years ago. Itnow has 165 companies with 30,000 workers. The sector drills and services wells, so it is always the hardest hit in a downturn.

Salkeld said his industry's best hope is in new pipelines.

"Our hope is to get pipelinesbuilt," said Salkeld."Because for the services sector, that's jobs well beyond the pipelines being built, it's the job needed to keep those full with oil and gas."

Pipelines are unlikely to be an immediate solution, though. If approved, the best-case scenario has Kinder Morgan beginning the TransMountain expansion in September2017.

In the meantime, the sector hopes for a swing upwardfor oil. King is callingfor oil to average $60US a barrel next year,an outlook he says is optimistic and doesn't include a freeze from OPEC.

"If OPEC does pull off some sort of cuts, that should help to accelerate the process and you should see a lifting of prices even faster than this fairly optimistic assessment."