Hopes for a major recovery in oil prices this year are dimming, which could lead to a gusher of energy company mergers and acquisitions as corporate finances creak under the strain.
The deal flow in the Canadian oil patch has been muted so far this year, as would-be sellers waited for an uptick in commodity prices to lift the potential proceeds they could garner for their assets. At around $5-billion, the transaction value in the first half was about a quarter of the year-earlier amount.
Now, a flood of crude from the Organization of the Petroleum Exporting Countries (OPEC), resilient U.S. supplies and fears over Greek economic contagion are conspiring to keep a lid on oil prices.
Debt-heavy Canadian oil producers, such as Legacy Oil + Gas Inc. and Pacific Rubiales Energy Corp., have agreed to buyouts in recent weeks after exhausting other efforts to strengthen their balance sheets. If crude is stalled again, more deals are likely on tap.
"Clearly, the guys who are more overleveraged are going to be facing increasing pressure from the banks to resolve the situation that they're in," said Jeremy McCrea, analyst at AltaCorp Capital Inc.
U.S. benchmark oil rebounded past $60 (U.S.) a barrel in June from the low $40s in March. However, the Conference Board of Canada said on Thursday that the recovery appears to have run out of steam, adding to a chorus of bearish oil forecasts.
It predicted crude will stay under $65 this year, a far cry from levels above $100 a barrel a year ago.
U.S. shale-oil production has not declined as sharply as many analysts had expected, even as the number of rigs drilling in the United States fell by about half in seven months, said Kip Beckman, the Conference Board's principal research associate.
Adding to bearish data, the U.S. active oil-rig count rose by 12 in the past week, marking the first increase this year, according to oil service company Baker Hughes Inc.
Perhaps a bigger driver has been Saudi Arabia's adherence to its vow to protect market share against non-OPEC suppliers, even as prices tumbled, Mr. Beckman said.
"With those two factors, and [strength in] the U.S. dollar, that's why we're pretty conservative about any coming rebound. And there's quite a lot of downside risk," he said.
West Texas Intermediate oil fell 42 cents to $56.54 a barrel on Thursday, a day after skidding more than 4 per cent to a two-month low in reaction to an unexpected build in U.S. inventories.
In its weekly tally, the U.S. Energy Information Administration reported U.S. stocks rose by 2.4 million barrels in the week ended June 26, owing to high domestic output and increased imports. The market had expected a withdrawal.
Michael Loewen, commodity strategist at TD Securities, expects WTI to remain stuck in the current range for a while due the global oversupply of crude.
In a report, Mr. Loewen predicted a recovery in Canadian production, following extensive spring maintenance at oil sands plants and the shutdown of bitumen projects due to recent forest fires, will weigh on U.S. oil prices.
Meanwhile, the potential end to sanctions on Iran's oil exports as nuclear talks with world powers continue is heaping additional pressure on global prices.
Crude's shift into neutral has hit Canadian oil and gas stocks hard. The Toronto Stock Exchange's S&P/TSX energy index fell this week below its March low.
Mr. McCrea pointed out, though, that the industry slowdown is having a positive impact on some companies. Oil-field service rates have dropped by as much as 15 per cent to 20 per cent in the downturn, which may prompt healthier producers to increase drilling activity in the coming months.