North American crude prices plunged deeper Monday, diving below $50 (U.S.) a barrel for the first time since early 2009 and raising new fears about mounting losses in Canada's battered oil industry.
The months-long rout in the oil market shows no signs of easing. While producers in Canada, the United States, Russia and Iraq continued to increase production as 2014 ended, Saudi oil minister Ali al-Naimi signalled the kingdom is prepared to ride out a severe downturn in order to protect its share of the global market.
For many Canadian producers in the oil sands and shale oil plays, selling prices have fallen well below their break-even points. Analysts say it could take as much as six months for oil-industry dynamics to recalibrate to lower prices, and are therefore anticipating further weakness.
"The market is getting to the point where it needs to see some tangible response in supply and demand before it changes course," Amrita Sen, chief oil analyst with London-based Energy Aspects Ltd., said in a telephone interview.
"The problem is supply and demand always takes longer to respond."
In trading Monday, the S&P/TSX energy index dropped 5.5 per cent as West Texas intermediate dove another 5 per cent – or $2.65 – to $50.04 for its lowest close since April, 2009. Analysts said prices could easily fall to the low $40 range, or even into the $30 range before rebounding in the second half of the year. Western Canada select – the benchmark heavy crude – has dropped to about $34.50 a barrel, reflecting its discount to WTI.
Ms. Sen estimated 25 per cent of current global oil production is unprofitable at current levels, including much of the oil sands and the U.S. shale oil sector.
"At these prices, the damage to the industry is massive, just massive," she said.
That appears to be what Saudi Arabia is counting on, confident in the knowledge that it is the low-cost producer in the world, though the kingdom will likely have to run budget deficits in pursuit of that strategy.
Some industry analysts are still hopeful that Saudi Arabia will move to stop the carnage when prices fall low enough. But in a year-end interview with the Middle East Economic Survey (MEES), Mr. al-Naimi reiterated his stance that OPEC will not intervene to cut production, even if prices drop to $20 a barrel. He said it defies market logic for low-cost producers such as Saudi Aramco to yield market share to higher-cost competitors in the U.S., Canada, Russia and Brazil.
"As a policy for OPEC – and I convinced OPEC of this, even [Secretary-General Abdallah] Badri is now convinced – it is not in the interest of OPEC producers to cut their production, whatever the price," the minister told MEES.
Calgary-based companies have already slashed capital spending plans – and in some cases dividends – and more spending cuts and project cancellations are expected, with the pain spreading to drilling companies, engineering firms and other support industries.
Syncrude Canada Ltd. – Canada's second oldest bitumen mine – needs prices around $65 (Canadian) to $70 a barrel to cover operating costs, royalties and capital spending required for maintenance, Ryan Kubik, chief executive at the joint venture's largest partner company, Canadian Oil Sands Ltd., said in an interview in December. His company cut its dividend by a nearly a third in December, and he told The Globe and Mail that it could look to cut it further if prices don't recover.
Syncrude upgrades its bitumen and markets synthetic crude – which was trading Monday at the equivalent of about $53.50 – far below the threshold indicated by Mr. Kubik.
Current prices have pulled most existing oil sands projects below thresholds for profitability where companies can cover their capital expenditures and earn a return of 10 per cent, said Samir Kayande, analyst at ITG Investment Research. "Profitable implies that you're recovering your initial capital costs, and you're not right now," he said.
The most efficient steam-driven oil sands projects, such as Cenvous Energy Inc.'s Foster Creek and Christina Lake developments and Devon Energy Corp.'s Jackfish venture, are in the best shape to keep generating enough cash flow to maintain operations.
Companies have already deferred spending on longer-term projects. Cenovus, for example, said it was halting expenditures on the early-stage developments such as Telephone Lake and Narrows Lake, where there is no current production.
Oil sands projects are among some of the highest-cost energy developments in the world. Analysts said even large players with deep pockets are expected to start deferring spending on major projects.
"It's kind of like what Warren Buffet says – when the tide goes out you see who's swimming naked," Mr. Kayande said.