After three months of relative price stability, oil markets are dashing the cautious optimism that had taken hold among producers battered by a 30-month slump.
Crude prices fell to three-month lows Tuesday, the seventh consecutive daily decline. Traders were unnerved by rising inventories and signs of cracks in OPEC's adherence to a production agreement that had buoyed global crude prices this winter. The recent price slide is leading Canadian producers to revisit their spending plans, with "caution" now being stressed over "optimism."
Any planned increase in Canadian oil-patch activity is now likely on pause, said Dan Tsubouchi, chief market strategist of private-equity group Stream Asset Financial Management LP. Many budgets assumed an oil price of around $55 (U.S.) a barrel. If low prices continue, a round of board meetings in early May could see capital-expenditure budgets cut.
"Look for third-quarter drilling to be much less than expected. Rigs will be available in Canada," he said.
However, companies are now better-suited to withstand low prices, and there's not the same sense of crisis that there was in early 2016 when oil prices plummeted, Mr. Tsubouchi said. "They're going to be more conservative because they remember last year. It's not optimistic but it isn't like last year. It's way better."
In trading Tuesday, West Texas Intermediate fell to its lowest level since Nov. 29, the day before Saudi Arabia led OPEC in a deal to cut production by 1.8 million barrels a day for the first six months of this year. WTI lost 68 cents, or 1.4 per cent, to settle at $47.72 a barrel.
Early last week, the North American benchmark traded at about $53. Oil executives at the opening of last week's IHS Markit's CERAWeek conference were optimistically talking about "green shoots" and the rebirth of the shale-oil boom, and then watched prices slide through the course of the week.
"One of the things that was helping to keep prices in the low $50s was the view that OPEC was fully committed" to its production agreement, Royal Bank of Canada analyst Helima Croft, said. "When you take that pillar away, the support for the 50s is fragile, given where we still are in terms of inventories. It can get away from you."
In its monthly market report issued Tuesday, the Organization of the Petroleum Exporting Countries said that Saudi Arabia was producing at a higher level in February than had been expected, although it is still respecting its pledge on production cuts. Saudi oil minister Khalid Al-Falih complained in the past week about lack of compliance among some signatories to OPEC's agreement with major non-OPEC producers.
At the same time, U.S. companies are ramping up their production of shale oil, particularly in the Permian basin of west Texas, where companies have slashed costs and boast about being able to increase production even with prices below $50 a barrel.
In Houston at the CERAWeek conference, Mr. Al-Falih warned that the Saudis were not prepared to cut their production only to see competitors take market share at the kingdom's expense. He warned investors against "irrational exuberance."
Ms. Croft said Russia has not fully complied with the production-cut agreement, while Iraq's oil minister has been complaining about its terms and promising to ratchet up output in the second half of the year. And then Mr. Al-Falih arrived in Houston to find American companies "high-fiving" over the recovery in the shale-oil fields, she said.
"It was the perfect storm to bring the return of the stern Saudi face; they're saying, 'We're not going to do this all for you, get your act together,'" she said.
There is considerable uncertainty over whether the OPEC production agreement will be extended past June when the cartel meets in May, though the recent price slump will strengthen the resolve of the group's members to co-operate. Failure by OPEC to renew the agreement could see prices fall back to the low-$40 range, IHS Markit vice-president Roger Diwan told the conference last week.
RBC analyst Michael Tran sees no end to increasing U.S. production in 2017. Many Permian producers have hedged production, and are locked in at $53 or $54 a barrel for the year, "which ultimately means it doesn't matter where prices go. It's still going to be 'drill, baby, drill' for the balance of this year."
When it comes to Canadian oil producers, he said there are two different stories this week: Some satisfaction among firms who hedged their crude production, and a lousy week for those who didn't.
"It certainly doesn't help that we're back in the 40s," Mr. Tran said. "Hedging is really an insurance policy to make sure you can live to see another day – it's protecting against another significant flush lower."