Industry, analysts at odds over crude prices

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Canadian oil prices are on their way up, says energy heavyweight Canadian Natural Resources Ltd., sketching a future of good times just around the corner.

Nope, say a pair of financial analysts. It's going to stay tough for a while.

Forecasting oil prices is the oil patch version of drafting the Farmers' Almanac. It is an inexact science, at best.

But serious money rides not only on where crude prices turn but, for investors, on figuring out when and where that might happen. In the case of CNQ, it's a matter of convincing markets that better fortunes are ahead.

Without a refinery, the company is hugely dependent on the price of crude, so it's got plenty at stake. In its earnings call Thursday it argued that the weakness of the past couple of years – when North American WTI crude has traded at a discount to the international Brent, and Canadian oil has sold at a further discount to WTI thanks to pipeline and production issues – is just about over.

"We believe we're about to enter an outstanding era for heavy oil," said president Steve Laut. Why? Look at the U.S. mid-west, he said, where some 300,000 barrels a day of heavy oil refining capacity is set to start up in the next year, providing a new demand pull.

Then there are the cost factors: it takes a lot of natural gas to make heavy oil, but gas prices are weak and staying weak. Plus, diluent (the thinning product used to make heavy crude flow in pipelines) is coming down in price. "For the first time most, if not all, the key factors are in our favour," said Mr. Laut. If that's true, CNRL is, of course, one of the companies that stands to benefit the most.

Which is why an outside voice might not be a bad thing – and analysts aren't buying it.

"Gentlemen can agree to disagree," Deutsche Bank analyst Paul Sankey says in research report. He explains why the poor pricing is here to stay. While it's true, he says, that oil refineries are going to kick up demand for heavy, that's going to be set against the spectacular growth in light oil – from surging plays like North Dakota's Bakken – that are flooding the market. "The problem is, if light over-supply causes [North American] light prices to fall, it will bring down the whole NA crude complex, regardless of demand for heavy, since refiners will only run heavy if it is 8-10 per cent below light," Sankey writes.

Andrew Potter, at CIBC, agrees. Heavy maintenance work at refineries will make for some difficult months ahead, he writes in a note, and that portends rough waters for Canadian Natural in particular. With "heavy oil differentials expected to remain wide and volatile over the near term (averaged 32 per cent in April, 19 per cent in May, 29 per cent in June, and 23 per cent in July), we anticipate that the next few quarters will be tough for CNQ."