Alberta budget 2016: How to find the right price for oil

Alberta Finance Minister Joe Ceci is about to take his first real dip into the world of oil price forecasting in the NDP government's budget Thursday.

Described as everything from a mug's game to throwing darts, there's one certainty about oil price predictions for finance ministers — the act is as much about politics as it is budget making. 

The winds of price change are blowing.- Martin King, FirstEnergy Capital

Pick a low price, and governments will be blamed for low-balling estimates with the goal of notching an easy win later on. 

Go too high and the budget itself risks being compromised, while the need to revise deficit numbers higher down the road will give opponents ample ammunition to lambaste your financial performance.

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Unenviable as the task may be, pegging an oil price is one of the most critical jobs facing budget makers in not just Alberta, but also Saskatchewan and Newfoundland and Labrador.

Before Ceci announces his budget, here's a guide to what price is right. 

$20 range

There has been fear that prices could tumble into the $20 US per barrel range. Prices did drop below $30 at the beginning of this year, but the slump was short-lived. 

A price forecast in the $20 range is where the federal government pegged oil in its recent budget … well, sort of. The government built a $6-billion contingency fund into the budget in case oil would plunge that far.

Oil is volatile, but few expect the floor to fall out from prices again. 

$30 range

It would be a little bearish if Ceci decides to peg oil as averaging in the $30 range this year, but a safe bet considering the global oversupply of oil and high storage levels. Oil has largely stayed in this price range since the start of the year. 

"If I had a chance to give advice to minister Ceci, I'd tell him something below $40," said Glen Hodgson, the chief economist with the Conference Board of Canada. "Something under $40 is a prudent, but also fairly realistic, assumption given where prices are today." 

The Conference Board of Canada expects oil to average around $37 for the 2016 calendar year. The Alberta government would forecast for the upcoming fiscal year, which ends in March 2017.

$40 range

Oil is currently sitting in the $40 range after gaining value in the last month. Oil closed at $42.17 on Tuesday, for West Texas Intermediate. It's likely the safe bet at this point, considering many expect oil will average $40 in 2016 and $52 next year, according to the federal Finance Department's February survey of private sector forecasts. 

"Indications are growing that a significant downward supply move is underway in the United States (and other countries), with preliminary signals that the enormous overhang in U.S. crude oil inventories may finally be starting to roll over," said Martin King with FirstEnergy Capital, in a recent report to clients.

King is forecasting oil at $40.35 for 2016 and $55 for 2017.

"Though we suggest not throwing all caution to the wind in terms of a more price-bullish approach to crude oil, the winds of price change are blowing nevertheless," he said.

$50 and higher

Now there is a bullish price. The oil patch would love to see this kind of return right about now. Just imagine a recovery like this just before the Calgary Stampede? Now that would be quite the party.

Ceci is unlikely to peg oil this high, considering the government is trying to brace Albertans for plenty of red ink. If oil does end up trading at this level, the budget shortfall would be drastically reduced. 

If it happens, cowboy boot and Stetson-wearing partygoers will get rowdy this July in Calgary, but don't expect the roof to be blown off at corporate parties.

Bull, bear or playing it safe

Alberta is expected to table a budget with at least a  $10-billion shortfall, largely because of the oil price crash in the last two years.

Royalty revenues fell from $8.9 billion in 2014-15 to only $2.5 billion this fiscal year, according to Ceci.

The government's fall budget forecast oil prices at $50 US a barrel this year and $61 US in 2016-17. So far, those estimates figure to be quite high-reaching.

While Ceci can't control the price of oil, how the government forecasts prices in the next 12 months will show how much confidence it has in a recovery. 

Albertans, as well as the opposition, are waiting to hear what he has to say.

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