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The decimated energy sector has rallied hard off of 20-year lows, pushing Canadian stocks to a decent gain on a day that saw the U.S. market slip.

For the first time since the COVID-19 pandemic consumed global financial markets starting in early March, the S&P/TSX Composite Index meaningfully diverged from U.S. equity benchmarks, with a gain of 2.6 per cent on Tuesday. The S&P 500 index dropped by 1.6 per cent.

Canada’s biggest oil sands players led the advance, adding to a rebound that started on Monday. Over just two trading days, Canadian Natural Resources Ltd. shares have surged by 45 per cent, and Suncor Energy Inc. by 37 per cent.

Potential catalysts for the sudden reversal include expanded federal wage subsidies that would apply to energy sector employees, as well as Tuesday’s announcement that the long-delayed Keystone XL pipeline would go ahead with support from the province of Alberta.

So precipitous has been the downfall in Canadian energy, that even a slight improvement in sentiment can make a big impact.

“Things are still very concerning, but at least we're having some signs of confidence that things will get better over a bit longer timeframe,” said Les Stelmach, an energy portfolio manager at Franklin Bissett Investment Management.

On Monday, Russia seemed to soften its position in its dispute with Saudi Arabia that started a price war between the two countries, as Russian President Vladimir Putin agreed to talks with U.S. officials.

And TC Energy Corp.’s plan to start construction on Keystone XL is a welcome development in a sector that faces a long-term shortage of pipeline capacity.

None of which really helps the Canadian oil patch survive the current crisis.

“Most people are concerned about these companies going bankrupt in the next couple of quarters,” said Eric Nuttall, senior portfolio manager at Ninepoint Partners.

The curtailment of travel and industrial activity in the fight against the coronavirus has cut deeply into demand for gasoline and jet fuel. Estimates for the level of demand destruction for the month of April range as high as 30 million barrels per day, representing nearly one-third of global crude demand.

In March, global oil prices fell by more than half, while the price per barrel of Alberta crude currently sits at around US$5.

“Demand for Western Canadian Select is non-existent right now,” Mr. Nuttall said. “And we are running out of physical storage.”

Senior and integrated producers generally have enough liquidity to get them through the year. And most of Canada’s smaller and medium-sized producers have hedged this year’s output by locking in higher prices in advance.

Like the broader economy, the energy sector’s prospects are highly dependent on the duration of the coronavirus crisis.

For energy companies facing a liquidity crunch, there is hope that lenders will be flexible. “We're seeing the banks be somewhat understanding,” Mr. Stelmach said. In some cases, lenders are offering extensions and renewals rather than calling in loans.

Loan guarantees are also expected to be included in a multibillion-dollar aid package for the oil patch, which Finance Minister Bill Morneau said last week was coming soon.

These incremental developments are insufficient to explain the magnitude of the move in Canadian energy stocks so far this week, with the S&P/TSX Capped Energy Index rising by 30 per cent.

There was some talk in trading circles that a big U.S. investor has accumulated shares of Suncor and Canadian Natural Resources over the last couple of days.

“There are so few market participants, that all it takes is one guy to step in,” Mr. Nuttall said. “You can have a 30 per cent rally on nothing.”

Wall Street

Wall Street’s three major indexes tumbled on Tuesday, with the Dow registering its biggest quarterly decline since 1987 and the S&P 500 suffering its deepest quarterly drop since the financial crisis on growing evidence of massive economic damage from the coronavirus pandemic.

In one of the fastest turns into a bear market, the S&P 500 and the Dow both ended the first quarter more than 20% below the end of 2019, as the health crisis worsened in the United States and brought business activity to a standstill.

It was also the S&P’s biggest first-quarter decline on record as consumers were advised to stay at home, leading businesses to announce temporary closures and massive staff furloughs.

As a result, economists have slashed 2020 growth expectations and investors, eying dismal quarterly financial reports, fear corporate defaults and mass layoffs would lead to a deep recession.

An unprecedented round of fiscal and monetary stimulus had helped equity markets edge higher last week following wild swings that saw the benchmark S&P 500 rise 9% and slump 12% in two consecutive sessions.

But this was not enough to give investors confidence.

“After the battering we’ve taken in the last month, people aren’t willing to make big bets in any direction right now, especially since we’ll have more insight from commentary in early earnings reports starting next week,” said Carol Schleif, deputy chief investment officer at Abbot Downing in Minneapolis.

Many investors were also likely being cautious ahead of the release of jobless claims data on Thursday and the March non-farm payroll report on Friday, said Steven DeSanctis, a strategist at Jefferies.

“We’re leading into the end of the week that’s going to have more of the fireworks,” he said.

The Dow Jones Industrial Average fell 410.32 points, or 1.84%, to 21,917.16, the S&P 500 lost 42.06 points, or 1.60%, to 2,584.59 and the Nasdaq Composite dropped 74.05 points, or 0.95%, to 7,700.10.

The technology-heavy Nasdaq registered its biggest quarterly decline since the end of 2018.

The utilities and real estate sectors were among the biggest decliners on Tuesday, with 4% and 3% declines respectfully following a recent rally, when investors sought ways to weather the economic slump.

The energy index rose nearly 1.6%, boosted by a rebound in prices on the day although crude oil benchmarks ended a volatile quarter with their biggest losses in history, as both U.S. and Brent futures were hammered throughout March by the coronavirus pandemic and the eruption of a price war between Russia and Saudi Arabia.

After bouncing between gains and losses, the technology sector ended the day down 1.9%.

Declining issues outnumbered advancing ones on the NYSE by a 1.25-to-1 ratio; on Nasdaq, a 1.04-to-1 ratio favored decliners.

The S&P 500 posted one new 52-week high and no new lows; the Nasdaq Composite recorded 14 new highs and 37 new lows.

With files from Reuters