CALGARY — As OPEC member countries and Russia were making a deal to cut 10 million barrels of daily oil production Thursday, RBC Capital Markets analysts expect Canadian oil producers to be forced to cut back roughly a third of total domestic oil production — or 1.7 million bpd.
OPEC members and Russia have pushed other countries to cut output too, and a historic meeting of G20 energy ministers is planned Friday, which is expected to include Canada’s Natural Resources Minister Seamus O’Regan.
The minister was in meetings Thursday with his counterparts in the U.S. and Mexico in preparation for the meeting, according to a statement.
On Thursday, O’Regan also spoke with Alberta Energy Minister Sonya Savage, Saskatchewan Energy and Resources Minister Bronwyn Eyre, and Newfoundland and Labrador Natural Resources Minister Siobhan Coady about taking a “united approach” heading into Friday’s G20 meeting.
“Canada is heading into an unprecedented meeting of G20 Energy Ministers this Friday, and a united approach puts us in the best position to support our workers and our economy,” O’Regan said in an email, noting that the oil price collapse has had a “devastating impact on Canada’s oil industry and its workers.”
Canadian crude is priced as “some of the cheapest barrels on the planet
RBC’s Michael Tran
Alberta’s energy minister was also taking part in Thursday’s negotiations among OPEC and other oil-producing countries about curbing bloated global supplies.
“We have not been asked to constrain Alberta energy output,” Premier Jason Kenney told reporters. “The main concern in OPEC+ is that North American producers not surge production to occupy the space created by their own curtailment, should they do it.”
Global oil prices initially traded up on the news of an OPEC+ output cut but then swiftly plummeted. U.S. futures settled down 9.3 per cent, to US$22.76 a barrel while Brent closed 4.1 per cent, lower at US$31.48 a barrel.
The situation in Canada was far worse as Western Canadian Select benchmark heavy oil prices collapsed 50 per cent to US$3.59 per barrel, in part due to a lack of storage space and cratering demand for fuel across North America, as commuters stay home to prevent the spread of the coronavirus.
Canadian crude is priced as “some of the cheapest barrels on the planet,” RBC Capital Markets managing director, global energy strategy Michael Tran said Thursday, adding that to balance the market, he expects domestic oil producers to cut between 1.1 million to 1.7 million bpd of production.
“You’re looking at a between 22 per cent to 34 per cent reduction in Canadian production,” Tran said. “Those are unbelievable numbers but these are unbelievable times.”
Tran said the OPEC+ deal between Saudi Arabia and Russia on Thursday was historic given the volume of the cuts, but noted the production cuts are less than the global collapse in oil demand.
OPEC and its allies like Russia met by video conference Thursday, and agreed to the outlined deal to cut production by about 10 million bpd, delegates told Bloomberg, asking not to be identified ahead of an official statement. That reduction may continue for just two months, with the curbs subsequently tapering off depending on the evolution of the coronavirus.
The plan included cuts of about 5 million bpd from producers outside the group known as OPEC+ and could be made gradually, as the group seeks to overcome resistance from the United States whose involvement they see as vital to a deal.
“COVID-19 is an unseen beast that seems to be impacting everything in its path,” OPEC secretary-general Mohammad Barkindo said in a speech at the online gathering. “The supply and demand fundamentals are horrifying” and the expected oversupply, particularly in the second quarter, is “beyond anything we have seen before.”
While the headline cut equates to a historic reduction of about 10 per cent of global supply, it makes up just a fraction of the demand loss, which some traders estimate at 35 million bpd.
Calgary-based ARC Energy Research Institute published figures drawing on U.S. Energy Information Administration data showed that gasoline, diesel and jet fuel demand had fallen by 7 million bpd alone in the last three weeks.
The collapse across the oil value chain has caused producers to shut in production and caused some companies, such as Calgary-based Husky Energy Inc., to reconsider previous asset sales.
The Financial Post has learned that Husky had dropped its plan to sell off its network of retail gasoline stations.
“Due to the current market environment, we have suspended the strategic review of our Canadian retail and commercial fuels business,” Husky spokesperson Kim Guttormson said in an email.
Other companies, including Suncor Energy Inc. and Athabasca Oil Corp., have announced plans to suspend some oilsands production.
“Due to the severity of demand destruction in North America in April and May, we estimate that shuttered oilsands and heavy oil curtailments in Western Canada could exceed 1.1 million barrels per day in the second quarter of 2020, with additional near-term downside risk,” Rystad Energy senior analyst Thomas Liles said in a release Thursday.
The Norwegian market research firm is predicting that some level of output cuts in Canada are expected to last for the course of the year. Oil producers in Canada will cut back 513,000 bpd of oil production in the third quarter and 293,000 in the fourth quarter.
If those cuts are realized, Rystad predicts Canadian producers would end up shutting in the most production globally for economic and cost reasons, followed by Iraq, Venezuela and Brazil.
With files from Bloomberg and Reuters