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Oil pipes remain in storage on April 24, 2020 near Odessa, Texas.

PAUL RATJE/AFP/Getty Images

Oil prices extended their dizzying drop on Tuesday as investors worried that falling demand for fuel and ever-shrinking storage capacity could pull crude futures back below zero for the second month in a row.

Benchmark West Texas Intermediate crude fell by 3.4 per cent, after a 25-per-cent drop on Monday, adding to concerns for Canadian energy companies that face curtailing more than a million barrels a day of production and slashing more spending this year, in some cases for a third time. The WTI contract for June delivery (the what’s called front-month or prompt-month contract) settled at US$12.34 a barrel on Tuesday, down 44 US cents for the day and 76 per cent since the start of the year, despite a recent deal among the Organization of Petroleum Exporting Countries and its allies to cut output.

Husky Energy Inc. and Cenovus Energy Inc. kick off first-quarter financial reporting among large oil-patch players on Wednesday, and investors will be looking for details on producers’ strategies for weathering the chaos in energy markets wrought by COVID-19 and the plunge in crude prices.

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“The market is increasing in volatility, and it is justified because there are a lot of concerns about storage filling up and because of demand destruction of historic proportions,” said Phil Flynn, energy market analyst with Price Futures Group in Chicago. “But it’s also because we’re pulling liquidity out of the front end of the curve - the June contract.”

Last week, prompt-month U.S. oil futures went negative for the first time, with the May WTI contract settling at minus US$37.63 a barrel. No buyers wanted to be left holding the commitment to take delivery of crude when they could not access storage. Now, prices have tumbled again as oil-linked exchange traded funds have dumped the June contract, fearing a repeat of the predicament.

United States Oil Fund LP, the world’s largest oil ETF, fell 15 per cent on Monday, after a 39-per-cent drop last week. The fund said Monday it was selling all its holdings in the June WTI contract. That reflects fears that negative oil futures – and the potential for massive financial losses – could return before the next contract expiry, Mr. Flynn said.

In Canada, the economic slowdown wrought by COVID-19 and the collapse in oil prices will mar producers’ quarterly financial results, with the pain having intensified in March. Since then, the focus has turned to a massive global oversupply of oil.

The largest producers have slashed spending to cope with sharp declines in cash flow. So far, big companies have said their financial wherewithal remains intact.

“Companies have to figure out what their strategies are going to be with the tanks topping,” said Laura Lau, chief investment officer at Brompton Funds. “Are you going to shut in production, and by how much? What are you going to do with your bank loans? I wouldn’t envy any CEO today.”

WTI averaged US$46.17 a barrel in the first quarter, compared with US$54.90 a year earlier. Western Canadian Select heavy oil, a proxy for oil sands derived crude, has been selling for less than US$10 a barrel since late March, well below break-even levels for any producer.

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Husky and Cenovus have slashed their budgets twice since the beginning of March, when the coronavirus restrictions began to have an impact on global fuel demand. Further reductions across the sector are a strong possibility, Ms. Lau said.

Earlier this month, Husky said it shut off 80,000 barrels a day of Western Canadian oil production, and added that its U.S. Midwest refineries were running at just 60 per cent of capacity.

Cenovus has cut its spending by 43 per cent since setting its 2020 budget late last year, and said its oil annual sands output is expected to be 6 per cent less than forecast. The company also suspended its dividend.

Cenovus stock is down 67 per cent since the start of the year and Husky 65 per cent. The S&P/TSX capped energy index has been roughly halved since the start of the year, as the industry disaster scenario has played out.

Michael Dunn, analyst at Stifel FirstEnergy, said he expects companies to announce curtailments at oil sands projects throughout the quarterly reporting season. That could include cuts at nearly all steam-driven ventures as well as potential shutdowns at the Suncor Energy Inc.-led Fort Hills mining project and Imperial Oil Ltd.'s Kearl development, he said.

“With global crude oil demand estimated to be down 25 [per cent] to 35 per cent, single-digit spot prices for Canadian crudes, and crude oil storage levels filling up fast, it is hard for us to fathom how Western Canadian crude production can avoid a one million-plus barrel a day drop in output in the coming weeks on a base that produced over four million barrels a day last year,” Mr. Dunn said in a research report.

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Suncor has already reduced output at Fort Hills by about one-third, and the company and its partners are in discussions about further cuts. Suncor, which reports first-quarter results on May 5, has cut spending by $1.5-billion.

The price of a barrel of benchmark U.S. oil plunged below $0 a barrel on April 20, 2020 for the first time in history, a troubling sign of an unprecedented global energy glut as the coronavirus pandemic halts travel and curbs economic activity. But what do negative crude prices mean in the real world? Reuters

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