World oil prices sank to their lowest intraday level in more than two years after the West's energy-security watchdog cut its forecast for demand growth, threatening the earnings momentum that had returned to the Canadian oil patch.
The International Energy Agency said in its September oil market report that economic weakness in Europe and China prompted it to temper its outlook for global oil demand in 2014 and 2015. Meanwhile, supplies are up from last year as the boom in light, tight oil from such regions as the North Dakota Bakken formation and Eagle Ford formation in Texas turns away imports to the United States.
The price weakness is remarkable in that it comes in the midst of heightened tensions in hot spots such as Iraq, Libya and Ukraine. It shows how fears of supply disruptions are having a shrinking influence on markets as production in countries outside OPEC, including Canada, surges and demand growth shrinks.
Deep discounts on heavy oil, once the bane of the Canadian sector, have shrunk since early 2013 as export transportation options have grown. But now returns for oil producers are shrinking again due to the lower world benchmarks.
"China data has been less than spectacular. Two days ago the numbers … inside the country, where demand growth for oil was supposed to be really large, disappointed [the market]. In Europe, obviously they're still fighting off a deflationary slowdown and demand weakness has been one of the cornerstones behind the recent selloff," said Phil Flynn, futures account executive at Chicago-based Price Futures Group.
"With all the turmoil in the world we've actually seen oil supplies rise – no major disruptions from anywhere in the world – in fact, we're seeing more oil come back online from Libya and other countries in Africa, and so the high prices have now created an oil glut. It's kind of a different world right now."
Brent crude for October delivery finished Thursday largely unchanged at about $98 (U.S.) a barrel, after sinking as low as $96.72 during the day – its weakest level since mid-2012. U.S. benchmark West Texas Intermediate also retreated during the day, but rebounded to close up $1.16 to $92.83 a barrel in New York. Still, it is down more than 10 per cent since the end of June.
The Canadian dollar, which often trades in tandem with oil prices, dropped nearly a penny against the U.S. dollar.
"While festering conflicts in Iraq and Libya show no sign of abating, their effect on global oil market balances and prices remains muted amid weakening oil demand growth and plentiful supply," the IEA said. "U.S. production continues to surge, and OPEC output remains above the group's official 30 million barrels per day supply target."
In its report, the IEA said it reduced its expectation of oil demand growth by 56,000 barrels a day to 900,000 this year, and by 100,000 b/d to 1.2 million in 2015.
Canadian energy shares, which had a sharp runup in the first half of the year, have weakened with oil and natural gas prices. But even now they are looking pricey by some measures, including the historical relationship between oil and the Toronto Stock Exchange's group of oil and gas stocks. The two have diverged to the widest margin in five years.
The group is down 7.4 per cent since the end of June, and yet investors are still placing big bets on share issues and initial public offerings.
Some of the weakness in commodity prices could be seasonal in nature, at least in North America, where refiners have entered their regular maintenance season, crimping demand for crude, said Martin King, analyst at FirstEnergy Capital Corp. Afterward, the WTI price could rebound back above $95 a barrel, he said.
"Maybe some cash flows come down a little bit here and there and earnings take a little bit of a hit, but I don't see this as an extended trend into next year or the year after that," Mr. King said. "I think we're seeing a short-term blip downward here."
Saudi Arabia, the largest and most influential member of the Organization of the Petroleum Exporting Countries, has shown it is not afraid to cut production to protect prices, and is likely to go that route should markets remain weak, said Mason Granger, a fund manager at Sentry Investments in Toronto. Its supplies averaged 9.68 million b/d in August, down from 10.01 million in July, the IEA said.
As a result, the weakness presents a buying opportunity for Canadian energy stocks, Mr. Granger said. "It's not a concern for us," he said.