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opinion

Yes, Canada and the United States are cutting oil production. Loads of it.

Unlike the Organization of Petroleum Exporting Countries and its allies, the reduction doesn’t come by design. It comes under duress.

U.S. President Donald Trump has said the intense talks among major producers resulted in an agreement to cut nearly 20-million barrels a day. But let’s be honest: you can only reach that number by including reductions in output around the globe that are unrelated to the pact. The President’s number is a mirage and oil markets know it.

What is really on the table is a deal to take 9.7-million barrels a day off the market. It was not nearly enough to make up for massive drop demand brought on by the COVID-19 slowdown, and only slowed the price skid. And as with all things OPEC, the key will be keeping the signatories compliant as global recovery begins and oil prices edge back up.

With the global deal in place, the spotlight in Canada is back on Ottawa and a long-promised multibillion-dollar package to provide liquidity to companies amid a sharp decline in cash flow putting thousands of jobs in jeopardy. U.S. benchmark crude is still down 60 per cent on the year. For Canada’s energy industry, the bleeding has slowed, but it has not stopped.

The OPEC+ and G20 video-conference negotiations stretched into four days of intrigue, as the group sought to keep the pact for the largest-ever output cut from unraveling at the hands of Mexico. The country refused to reduce output by its prescribed volume. Mr. Trump worked the phones and was able to convince Saudi Arabia and Russia to allow a smaller number for Mexico, with falling U.S. output standing in to backfill the commitment.

Thus ends the Saudi-Russia price war. Still hanging over the market is a drop in demand of more than 30-million barrels a day, or 30 per cent of pre-crash levels, with vehicles parked and aircraft sitting on runways worldwide.

In the U.S., shale oil emerged as an early victim of the crisis. Because production from each well drops off quickly, the business requires active drilling and much of it has been financed by debt.

At least one major shale producer, Whiting Petroleum, has filed for Chapter 11 bankruptcy protection, and analysts expect more to follow. Some major U.S. banks are reportedly setting up operating companies to run oil and gas assets from indebted energy companies in an effort to avoid loan losses.

U.S. energy secretary Dan Brouillette says production in his country could drop by two million to three million barrels a day by the end of this year.

Canadian producers are struggling with two major problems of their own – a devastatingly low price for domestic crude and shrinking available space to store all the oil that refineries can’t use when no one is lining up to buy fuel.

Western Canada Select heavy oil blend, a proxy for the oil sands, sold for about US$5.70 a barrel on Monday, according to NE2 Group, an unsustainable price for any company. The price is for oil that will ship in May.

Storage capacity for Canadian crude is estimated to be around 40-million barrels, and analysts have projected that oil could be sloshing up to the tank tops sometime in the coming weeks, forcing companies to shut down more crude output.

Already as much as 700,000 barrels a day have been taken out of circulation, and, according to Royal Bank of Canada, that number could hit 1.7-million barrels a day before the end of June. That would be more than a third of the country’s pre-crisis output.

An industry that can’t sell a large portion of its product, and what it can sell fetches a fraction of the cost of production – it all spells more pain for Canada’s energy sector.

Ottawa has already made wage support available for oil patch workers along with the rest of the economy. But as conditions remain weak, access to credit is a growing problem for companies as they seek to stay afloat - especially the small and midsize players.

It was almost three weeks ago that Finance Minister Bill Morneau said supports for the industry, including a backstop for banks that lend to the sector, could be announced in “hours, potentially days.” With an OPEC+ deal failing to ignite a price rally, that’s looking like an eternity ago.

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