Spurned by Russia last week, Saudi Arabia has unleashed an all-out war on rival producers with plans to raise its crude oil production significantly above 10 million barrels per day in April, at a time of demand destruction.
Riyadh and its OPEC counterparts were trying to convince Moscow last week to agree on co-ordinated oil cuts to the tune of 1.5 million bpd. But the Russians, eager to squeeze American shale producers in retaliation for U.S. sanctions on the country, would not budge.
“Expect more bloodshed in oil and the equities as Saudi Arabia announced on Saturday that it will hike output, consequently starting an all-out price war,” wrote Canaccord Genuity analysts.
That has triggered among the worst oil price collapses in history amid a global coronavirus scare that has sapped business and consumer sentiment. U.S. crude fell by more than 24 per cent, to US$33.20 a barrel this morning, while Western Canada Select benchmark was a touch under US$28 oil. Goldmans Sachs says oil could hit US$20 soon, especially as oil demand has been badly hurt by the health crisis.
A sustained decline could be catastrophic for the Canadian oilpatch.
“Western Canada could see a lot more layoffs especially as we enter spring break-up with employees told not to come back as winter programs come to a conclusion,” tweeted Martin Pelletier, a Calgary-based investor and FP columnist.
Eight Capital analysts say the Canadian corporate list “will be purged of weak balance sheets/asset bases”. Investors will focus on who has/doesn’t have flexibility in their capex budget and near-term debt repayments. If oil prices continue to fall, most have room to reduce capex, but Husky Energy Inc. and Ovintiv Inc. “are most at risk,” Eight Capital analysts wrote in a note this morning. Ovintiv was down 15 per cent in the U.S. in future trading.
Other energy producers are also bracing for a dramatic declines. Suncor Energy Inc. was down 15 per cent, Canadian Natural Resources Inc. plunged 20 per cent and Cenovus Energy Inc. fell nearly 24 per cent in U.S. futures trading, before the Toronto markets opened.
Production will likely become a battle of who has the deepest pockets, wrote Jeffrey Halley, senior Asia Pacific market strategist at Oanda.
“U.S. shale and Canadian tar sands are in for a nightmarish year I fear,” Halley, wrote late Sunday, according to a Market Watch report.
Canaccord Genuity says junior and intermediate Canadian producers “could be amongst the hardest hit” if oil prices go considerably lower, as investors either seek refuge in the larger cap names, or exit the space altogether. “If low prices prevail, we anticipate significant budget cuts, with reductions in dividends also likely.”
“While we believe Saudi Arabia’s ‘scorched earth’ strategy may be an attempt to bring Russia back to the bargaining table as quickly as possible, the duration of this price war (and its impact on oil prices) is difficult to predict.”
Here’s what you need to know this morning:
- Stocks fall most since financial crisis, oil plunges most since Gulf War. Here’s a look at the damage
- Oil drops 31% in worst loss since the Gulf War as price fight breaks out
- Ottawa to fly home Canadians stranded on cruise ship as number of cases across country increases
- Inside mining companies’ struggle to gain traction in climate change era
- FX volatility surges as yen gains 3%; loonie and other commodity currencies slump
- Conservatives call for spending cuts, waste reduction in federal budget
- Saudi Aramco shares dive, Gulf debt hit as oil price plunges
- IEA warns oil producers against playing ‘Russian roulette’
- Financial conditions are tightening at fastest pace since Lehman
- John Robson: Canada’s stark new reality barges in after Warren Buffett pulls out
- Warren Buffett’s exit from $9-billion Quebec LNG project after rail blockades ‘a signal’ to investors
- Here’s what you need to know to navigate the CRA this tax season
- Out of the frying pan … How Catherine McKenna’s new gig might prove even more of a powder keg than her last
- Are we really … drinking less? Or why White Claw’s arrival means more bad news for brewers
- Former ambassadors to China Howard Balloch, Guy Saint-Jacques and John McCallum testify before the special committee on Canada-China relations in Ottawa
- Canada Mortgage and Housing Corp. to release preliminary housing start data for February
- Ontario’s Chief Medical Officer of Health Dr. David Williams updates on the province’s response to COVID-19 in Toronto
- Calgary Chamber of Commerce hosts a conversation with CPP Investment Board CEO Mark Machin
- Corporate Earnings: Ensign Energy Services Inc.
The good ship “Federal Budget” looks like it is about to hit the rocks. Expect a broken promise as the federal debt/GDP ratio rises with moribund growth in the first half of 2020, writes Jack Mintz.
“What could also happen is something that we have not seen for some time: federal program spending outstripping revenues. This is called the primary (or operational) deficit when a government not only can’t cover debt interest payments (totalling $23.9 billion in 2018/9) but also its program expenses,” Mintz wrote. Read the full comment here.
— Please send your news, comments and stories to firstname.lastname@example.org. — Yadullah Hussain @Yad_Fpenergy
With files from The Canadian Press, Thomson Reuters and Bloomberg