Canada’s oilpatch is bracing for the impact of plunging crude prices after OPEC and its allies failed to reach a deal aimed at cutting production as economies slow because of the novel coronavirus.
Prices began sliding after Russia refused to support deeper oil cuts to cope with the outbreak of coronavirus and OPEC responded by removing all limits on its own production.
Global oil prices fell more than eight per cent Friday as the development revived fears of a price crash similar to 2014, when Saudi Arabia and Russia fought for market share with U.S. shale oil producers.
The benchmark crude contract in North America, West Texas Intermediate, was also down more than eight per cent on Friday morning, dropping below $42 US per barrel.
Since the start of the year, global oil prices have dropped more than 20 per cent.
‘Not good for governments reliant on oil revenues’
COVID-19 concerns and the impact on oil demand — plus the prospect of OPEC abandoning its role in trying to limit supplies — have the makings of a “toxic recipe” for oil prices, said Judith Dwarkin, chief economist at RS Energy Group.
“That’s not good for oil producers; it’s not good for governments reliant on oil revenues,” Dwarkin said.
“It’s generally not good for the Canadian economy, for which oil production and all the taxes and royalties and other revenue collected from that [are] an important part of the economy.”
OPEC sources told Reuters that Russia, one of the world’s biggest oil producers but not a member of OPEC, and Saudi Arabia, the biggest crude producer in OPEC, had failed to find a compromise despite several rounds of bilateral talks this week in Vienna.
As a result, the existing deal for output cuts will expire in March, so OPEC members and non-OPEC producers can in theory pump at will in an already oversupplied market, sources told Reuters.
OPEC members are responsible for about 40 per cent of the world’s oil production.
Coronavirus is cutting world crude demand
Oil prices have dropped in recent weeks over concerns about the spread of the coronavirus. It’s estimated the impact of the disease in China sliced about 900,000 barrels of daily oil demand from that country alone.
The impact has rippled out across global energy markets, including Canada.
On Friday, Calgary-based Vermilion Energy cut its dividend in half to deal with weakness in commodity prices and global economic fallout from the novel coronavirus.
Dwarkin said today’s news might add to the incentive for oil companies to cut capital spending, if they were already moving in that direction and should the price spiral continue.
“We’ve seen the punch and the counter-punch today, the Russians and the Saudis,” Dwarkin said.
“Let’s see what emerges in the next few days on that front before you know it to declare this bout over.”
Martin Pelletier, a portfolio manager with Trivest Wealth Council in Calgary, said he expects Canada’s oilpatch to “batten down the hatches” with oil prices falling.
“You’ve got to manage your balance sheet,” Pelletier said.
“Those who don’t manage their balance sheet — if this sell-off continues — are not going to make it.
“This [situation] could be over in a week or two weeks, but it may not be over for a couple months.“