Oil prices plunged more than 5 per cent Friday, bottoming out at historic lows as federal Finance Minister Bill Morneau said a program to help the oil patch, including a backstop for banks that lend to the energy sector, is on its way.
Western Canadian Select, the benchmark price for Alberta heavy crude, settled at record low of US$5.06 a barrel. West Texas Intermediate bottomed out at US$20.99 at one point, ending the day at US$21.84.
The prices underscore the dire situation facing energy companies, especially smaller ones, which are at risk of the terms of their debt and credit lines as cash flow and equity value dwindles.
The fear in the industry is that producers could have their lines of credit reduced or revoked just when they need them to stay afloat.
As COVID-19 continues to spread, some provinces have used emergency powers to enforce physical distancing by closing “non-essential" businesses. Companies whose employees work from home, or who use digital storefronts, can continue to do so. But in many provinces, only services deemed essential will have physical locations open. These include:
- Food and liquor: Grocery and convenience stores, restaurants (take out and delivery only). Pet-food stores included. Liquor stores are open on special hours.
- Utilities: Energy, water, telecom and garbage-collection services will continue to run.
- Shelters: Services will continue for homeless people and survivors of domestic violence.
- Banks: Financial services are on every province’s essential list, but some banks may have reduced or changed hours at branches.
- Government services: Health care and online higher education will continue, but public schools are closed.
- Transportation: Public transit, taxis and postal delivery are running, as are transportation sectors needed for supply chains.
“What we’re trying to make sure we do for that sector is support that sector with credit that will be guaranteed by the federal government to a certain extent to allow them to bridge through a difficult time, especially small and medium-size companies,” Mr. Morneau told reporters.
He said details should be announced shortly.
Oil is on track for a fifth-straight weekly loss as demand destruction caused by the coronavirus outweighs stimulus efforts by policy makers around the world. With three billion people in lockdown, global oil requirements could drop 20 per cent, International Energy Agency head Fatih Birol said as he called on major producers such as Saudi Arabia to help stabilize oil markets.
Analysts say it could get worse.
“This is an unprecedented demand collapse, and we’re not seeing the full brunt of it yet,” said Jackie Forrest, the senior director of research at Calgary-based ARC Energy Research Institute.
Martin Pelletier, a portfolio manager at TriVest Wealth Counsel Ltd. in Calgary, added that shipping costs are now more than $7 a barrel – so, in effect, the industry is facing negative pricing.
Canada exports the vast majority of its oil to the United States, shipping 4.1 million barrels a day there in December, according to U.S. government figures. With storage facilities almost full and Midwestern refineries dialling back their crude intake, cutting production is the only realistic option for the patch, though curtailment estimates range from one to two million barrels a day, Ms. Forrest said.
”How much demand is being lost is uncertain. How much refineries are going to turn down and how fast is uncertain. Directionally there will have to be curtailments, but the order of magnitude is uncertain," she said.
For its part, the Alberta government is monitoring the situation and has not decided if it needs to intervene by imposing deeper cuts to output, said Kavi Bal, a spokesman for Energy Minister Sonya Savage.
The last time Alberta restricted oil output, it was to solve a Canada-specific problem. The then-NDP government mandated a curtailment of 8.7 per cent at the start of 2019 to rein in a wide differential between WTI and WCS prices. The discount had surpassed US$40 a barrel amid a glut of supply within Alberta owing to limited pipeline capacity and maintenance outages at refineries.
Independent oil sands producers such as Canadian Natural Resources Ltd., Cenovus Energy Inc. and MEG Energy Corp. backed the policy. Integrated companies including Suncor Energy Inc., Husky Energy Inc. and Imperial Oil Ltd. opposed the cuts, arguing that the market should set prices, not the government.
The curbs remain in place under the Kenney government, but they have been relaxed.
Husky has already said it is reducing or shutting down unprofitable production and has cut $900-million from capital spending. It remains opposed to government intervention.
Canadian crude prices may come under even more pressure next week when the next monthly trade cycle begins with storage nearing capacity, said Tarun Ajwani, vice-president of energy technology company Validere and a veteran of Canada’s oil trade.
“Some of the bigger producers like Cenovus and MEG have commitments on the pipelines. They don’t really have a choice – they’ve got to keep oil flowing there,” Mr. Ajwani said. “You’re going to see a lot of sellers and no buyers. I’m assuming if we’re not at least at [storage] capacity in Canada, we’re probably going to be close to that.”
The global oil industry is suffering from a massive drop in demand, with the pandemic keeping commercial aircraft grounded and road traffic at a minimum.
Goldman Sachs said Thursday it expects oil demand to fall 18.7 per cent in April, after a 10.5-million-barrel drop in March.
A Royal Bank of Canada report this week forecast job losses almost three times as large as those in the Great Depression. It said energy-producing regions, which had not yet recovered from the 2014-16 oil collapse, will be hit particularly hard.
“We now project Alberta’s economic contraction – at -5.6 per cent – to be the most severe the province has ever experienced in a single year and the largest in Canada. Saskatchewan and Newfoundland and Labrador won’t fare much better with contractions of -4.0 per cent and -3.2 per cent, respectively,” the report said.
Despite the bleak numbers, there is a silver lining, Mr. Pelletier said.
“Gasoline demand is going to come back – it’s just a matter of when, not if,” he said.
“All of it will come back. And when it does, the situation will normalize. It’s just a question of how long can these companies survive from now until then.”
With a file from Reuters
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