The Canadian oilpatch absorbed yet another gut punch on Wednesday, as the price of Western Canadian Select Crude plummeted as much as 37 per cent during intraday trading under US$10 a barrel for the first time, raising questions about how long the sector can survive in such an environment and how many more blows are coming.
The combination of sharply dropping demand for oil, because of containment measures related to the coronavirus health pandemic, and on top of that a price war, in which Saudi Arabia and its OPEC counterparts aim to add three million barrels of oil per day to the global supply — roughly the equivalent of 78 per cent of what Alberta produces — has created a one-two punch.
The result is that Canada’s oil sector plunged into a crisis of unparalleled scale at lightning speed. On Wednesday, analysts said there was little certainty about how long COVID-19 or the price war could last, and even less certainty about the shape and timeline of a recovery.
“The last two price collapses both never hit prices we’re seeing today,” said Kevin Birn, an oil sector analyst at IHS Markit, adding, “I don’t think we’ve seen the full brunt of what may come — overall, global demand is still probably going to fall.”
Canadian crude dropped as low as $7.36, and West Texas Intermediate fetched $21.48, both below the break-even point for nearly all Canadian producers, said Birn.
Concerns about flying workers in from out of town as the coronavirus continues to spread led Syncrude Canada Ltd. to delay coker maintenance at its upgrader and Suncor Energy Inc. to push back planned work scheduled for May. The delays mean synthetic crude that wasn’t expected to be entering the market will continue to flow, adding to the glut.
I don’t think we’ve seen the full brunt of what may come — overall, global demand is still probably going to fall
Kevin Birn
Most of the Canadian oil producers suffered double-digit declines in their share price amid a wide-ranging market rout. Canadian Natural Resources Ltd. was down 17.5 per cent to $10.69, Suncor was down 17 per cent to $14.93 and Cenovus Energy Inc. fell 20 per cent to $2.21, to name a few.
Bank of America expects U.S. oil prices to fall below US$20, while Citigroup Global Markets Inc. estimates Brent crude to fall to US$17 per barrel as global oil demand contracts by around 11 million bpd in the second quarter.
“Oil markets are poised to get worse before they get better, ushering in a new era for petroleum,” Citi said in a note to clients.
Birn described the situation as maiden territory for the industry, where a surplus of oil is likely to build up quickly. But because of COVID-19, there’s little certainty about what future demand will look like and how that surplus will affect future production.
“What we’re dealing with now is a surplus and potential stockbuild, which really is unprecedented,” he said.
Tristan Goodman, president of the Explorers and Producers Association of Canada, said the industry has moved through similar crises in the past, before clarifying, “if you’re a historian, you can see these events in the past.”
But Goodman praised Prime Minister Justin Trudeau for acting swiftly to announce economic measures, including an $82-billion aid package announced on Wednesday, which included measures to help keep employees on the payrolls.
“You can’t make money at $30 oil, actually in most places around the world,” he said, adding that government support is needed because “you can’t pay people with chocolate coins.”
In the past week, Canadian companies have eliminated an estimated $3.5 billion in capital expenditures, by reducing drilling, trimming salaries, cutting office expenses and making layoffs, according to Todd Kepler, an oil and gas research analyst at Laurentian Bank Securities.
For example, on Tuesday, Kelt Exploration Ltd. announced it was cutting $80 million, about 36 per cent of its capital expenditures, by deferring several new projects and expansions, cutting production by 12 per cent amid other moves to shore up its balance sheet.
You can’t pay people with chocolate coins
Tristan Goodman
On the same day, Whitecap Resources reduced its capital expenditures by $160 million, or 44 per cent; and it also announced it would cut its monthly dividend from .0285 cents to .01425 cents, effective next month and estimated to save $70 million.
Kepler predicted some companies would not survive, and there likely would be a wave of consolidation. New wells are unlikely to be drilled, and production may decline slightly in the coming months, he said.
Still, he ventured out on a limb to predict that oil prices could come roaring back by the end of the year, depending on a couple of factors.
Because oil prices have plummeted so rapidly and so low, he predicted Saudi Arabia and Russia, the two key players in the price war, could return to the bargaining table, potentially negotiating a rebalance in supply production.
A valve wheel sits attached to crude oil pipework in an oilfield near Almetyevsk, Tatarstan, Russia.
Andrey Rudakov/Bloomberg
Before that happens, many of the most cash-strapped oil producers in the U.S. may end up taking some of their production offline.
“My view is the lower they go, the harder they’re going to bounce back,” he said.
His optimism also depends on a demand recovery by the end of the year, which he said would create tremendous investment opportunities because the stocks would be battered and there could also be a price squeeze.
Of course, Kepler qualified that this scenario also hinges upon the control of the coronavirus.
“If all of a sudden cases are into the millions, then this conversation is moot,” he said.
Angelo Katsoras, analyst at National Bank of Canada, said the showdown between Saudi Arabia and Russia may drag on for several months before either side gives in.
“Both countries also have the financial cushion to absorb losses for several months before worries begin to emerge over the potential impact,” Katsoras said in a note. “However, beyond this approximate time period, mounting pressure on their finances will force the two countries to re-open serious negotiations that will ultimately lead to an agreement that will have both sides crying victory.”
With a file from Bloomberg News
Financial Post
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