World and U.S. oil prices cratered to below $30 (U.S.) a barrel on Friday with no sign of stopping, as fears spread that shaky economic growth and the lifting of sanctions against OPEC member Iran would deepen a global supply glut.
U.S. benchmark West Texas intermediate (WTI) oil and Brent crude sank nearly 6 per cent to about $29.42 a barrel, and several analysts warned that the worst is yet to come. Oil tumbled amid uncertainty about the timing and volume of Iranian crude expected to hit the already oversupplied global market in the coming weeks and growing questions about demand, especially in China.
Canada's oil sands producers are now grappling with prices that are the cheapest globally, raising the spectre of deeper cuts to spending and employment levels, as the industry burns through rapidly dwindling cash flows.
The sharp sell-off shows how market worries have overtaken even the most bearish signals of supply and demand, and how crude may face further collapse before it begins to recover. A year ago, the industry was beginning to make cuts to capital spending budgets as crude hovered just under $50 a barrel, though many analysts predicted sharp increases by the middle of the year.
Instead, companies have slashed more than 40,000 jobs and billions of dollars of capital spending, cuts that have taken their toll on Alberta's and Canada's wider economy and pushed the value of the domestic currency to lows not seen in more than a dozen years. The Toronto Stock Exchange's oil and gas subindex slid more than 5 per cent on Friday to a level not seen since 2003.
A further drop in crude prices to as low as $25 is possible, Martin King, an analyst at FirstEnergy Capital Corp., said.
"This is a market that has now really kind of lost its connection with fundamentals. This is all about derisking, deleveraging. This has gone beyond anything to do with demand, anything to do with supply. It's just about getting the hell out of the way," Mr. King said.
Western Canadian Select, a blend of conventional heavy oil and bitumen from the oil sands, on Friday fetched about $14 less than WTI, broker Net Energy Inc. said, implying a value of roughly $15 a barrel for the Canadian oil.
With raw bitumen priced at less than $10 a barrel, oil sands producers are losing money each day, with many barely able to cover basic costs such as fuel and labour, said Jackie Forrest, vice-president at ARC Financial Corp. in Calgary. "It's pretty grim," she said.
Still, companies are unlikely to hit the pause button on producing assets, she said, in part because such projects have high fixed costs and carry technical risks associated with temporary shutdowns.
Numerous forecasters have chopped their outlook for oil prices this year, and warned of another possible downdraft as supply pressures mount.
Judith Dwarkin, chief energy economist at RS Energy Group in Calgary, said she expects supply to build up in the first two quarters of the year, with the pace abating in the second half.
"But whether that actually morphs into a stock draw [withdrawal from inventories] depends a fair bit on how much Iran actually manages to shoehorn back into the market," she said.
Another big question mark is production in U.S. shale regions such as the Bakken in North Dakota, which has been slow to ease, despite the pullback of drilling rigs. The state government said on Friday that production rose slightly to 1.17 million barrels a day in November, even as energy companies slashed spending to cope with the collapse in crude prices.
Edward Morse, veteran oil market forecaster at Citigroup, said in Calgary this week that the idea of $20-a-barrel crude – derided as investment-bank sensationalism just a few months ago – is becoming far more realistic.
"The $20 number is something you have to talk about," he said. When crude was at $45 a barrel in late 2015, the collapse was seen as theoretical. At current levels, "the likelihood is fairly great," Mr. Morse said.
However, the market cannot sustain current prices for very long, he said. "The question is how much longer. We, like other market analysts, have prices going up – not much in the first half of the year, but in the second half of the year, after we see more industry consolidation, after we see some more supply coming out of the market. The adjustment up could be fairly dramatic," he said.