Saudi Arabia is calling on Canada and other countries to participate in oil-output cuts to help halt the slide in global crude prices that is taking a heavy toll on energy-producing economies already struggling with the COVID-19 crisis.
The official Saudi Press Agency reported that the kingdom urged members of the Organization of Petroleum Exporting Countries, Russia and other countries to seek an agreement to “restore equilibrium” in the oil market. Crude prices shot up 25 per cent on Thursday in response to that and to a comment from U.S. President Donald Trump that Saudi Arabia and Russia could be near a deal to end a price war that has flooded markets around the world.
A source within OPEC+, which comprises the cartel’s membership plus Russia, Mexico and other allied producers, said non-affiliated countries such as Canada and Brazil would need to join in any co-ordinated output cuts.
Canadian officials said little about prospects for participating. The country’s oil producers have already cut output by hundreds of thousands of barrels a day rather than sell it in a market that has little need for it, with aircraft and vehicles parked and refineries across North America slowing operations.
In early March, Saudi Arabia and Russia met with the other OPEC nations in a bid to reach an agreement to reduce output to compensate for an expected drop in demand because of the coronavirus. The meeting ended in failure, and Saudi Arabia and Russia increased their output in a battle for market share. With the price war and a drop in demand of millions of barrels a day, the world’s storage tanks quickly filled. Market prices tumbled to their lowest in almost two decades, with some regional grades dropping below zero in recent days.
Mr. Trump said on Twitter that he had spoken to Saudi Crown Prince Mohammed bin Salman, who had talked with Russian President Vladimir Putin about ending the price war that has sent the global oil sector into a financial tailspin.
Mr. Trump said he “expects and hopes” the two countries will reduce production by 10 million to 15 million barrels a day. Saudi Arabia did not say it was close to such a deal.
Deputy Prime Minister Chrystia Freeland was circumspect when asked whether Ottawa would meet with Saudi Arabia and its fellow cartel members.
“It’s too early to say how this situation is going to develop, but we’re very closely engaged,” she told reporters on Thursday. “And I would also like to say [Alberta] Premier [Jason] Kenney is very involved and he has also been personally involved in conversations with the U.S. and that has also been very helpful.”
She said she has been in close contact with U.S. Secretary of State Mike Pompeo about the disruptions in the oil market that have hit the energy sector in both countries hard.
Canadian oil producers have reduced output by as much as 700,000 barrels a day for economic reasons, and that number may surpass one million this month as available storage fills up, analysts have said. Canada – which does not have a state-controlled oil company it can order to adjust output – has not participated in OPEC-led efforts to support prices before.
Mr. Kenney, whose province has one of the world’s largest oil reserves, has spoken with U.S. officials to propose a continent-wide solution to what he has called the predatory dumping of cheap foreign crude by Saudi Arabia and Russia. He has, however, resisted any calls for his government to impose deeper output cuts on companies, saying they will make such decisions on their own.
The price of West Texas Intermediate oil jumped US$5.01 to US$25.32 a barrel, its highest in two weeks. Western Canada Select heavy oil blend, a proxy for the Alberta oil sands, nearly doubled to US$8.65, according to NE2 Group. Even with the gain, the price does not allow most operations to break even. Still, the S&P/TSX capped energy index jumped 9 per cent, as investors showed optimism that has been rare since the crisis began.
“Keep in mind, COVID-19 demand destruction has not gone away,” Bank of Nova Scotia analyst Michael Loewen said in a note to clients. “A potential 10-15 million [barrels a day] supply cut would go a long way to re-balance the market and prevent some [storage capacity] concerns, but we’re not out of the woods yet. A global economic slowdown is taking place.”
The federal government is working on a rescue package for oil companies struggling with dwindling cash flow as debt and other cost obligations pile up. Finance Minister Bill Morneau has talked about providing a backstop for banks that lend to the sector.
Royal Bank of Canada’s securities arm on Thursday proposed a measure the government could consider to help companies faced with having to shut off production. In what RBC analysts referred to as a “shut and swap,” Ottawa could pay companies a fixed price now for oil output that would be curtailed, providing revenue so companies don’t have to borrow to stay in operation.
Companies could sell the oil when markets recover and operations resume, presumably at higher prices, and repay taxpayers. “Shut and swap avoids the double-whammy impact that lower production and prices could have on revenue streams,” RBC said.
With a report from Reuters
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.