Crude price plummet raises spectre of spending cuts, job losses in Canadian oilpatch

Plunging oil prices landed with a giant thud in Canada on Monday, sending tremors across the oilpatchand raising the spectre of spending cuts, production cutsand job cuts.

The collapse was triggered by a severe double whammy fears the spread of COVID-19 could trigger a global recession and an oil price war between Saudi Arabia and Russia.

The immediate consequences were grim.

The benchmark price for North American oil, West Texas Intermediate, initially fell by the most in one day since the 1991 Gulf War, before eventually settling at $31.13 US per barrel, down $10.15 US, on Monday.

"This is one of the biggest shocks that we've seen in the last 40 years," Jeremy McCrea, an analyst with Raymond James, said early Monday.

The global benchmark, Brent crude, closeddown 24 per centat $34.36 US a barrel.

Canadian energystocks were also hammered, with the S&P/TSXcapped energy indexdown more than 27 per cent.

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Now, the country'soil and gas sector likeothers worldwide isweighing the fallout and trying to assess the potential repercussionsif prices stay this lowfor months to come.

The energy sector accountedfor roughly $230 billion, or 11 per cent, of Canada'sgross domestic product in 2018.Crude oil alone directly contributednearly three per cent.

• WATCH: It was a devastating day in Alberta as some of the biggest energy players were hammered on the stock market.The CBC's Carolyn Dunn has the view from the ground.

Drop in oil prices another blow for Alberta

5 years ago

Duration 1:48

Albertas struggling economy was dealt a devastating blow with a major drop in oil prices on Monday.

Market watchers have already warned thatthe most vulnerable companies will be those carrying too much debt, have high operating costs andlimited access to funding.

McCreasaid the situation will be a test of companies' financial health.

"The question is who has ... the staying power and the balance sheets to make it through this disagreement that those countries have,"McCreasaid.

In the near term, he expects companies could reduce their capital spending plans by 30 to 40 per cent. Oil production could also come down very quickly.

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It's unwelcome news for an oil and gas sector that has had its share of struggles in recent years, whether its pipeline bottlenecks or a glut of crude that spurred Albertato curtail oil production in the province.

Further decreases in Canadian production might actually relieve some pressure on the pipeline network.But Monday's newswon't ease current anxiety aroundthe oilpatch, still stinging from thousands of jobs losses in recent years.

Alberta Premier Jason Kenney said Monday that his government's priority would be protecting jobs and the economy.

But when crude prices drop and stay low,oil companiesfeelthe financial squeeze. For some companies, the pressure point might be $45 US a barrel. For others, it could be in the $30s.

"The Canadian sector really starts to feel the pain under $40 a barrel,"said Peter Tertzakian,executive director of the ARC Energy Research Institutein Calgary.

"But, I emphasize, it's not just Canadian oil and gas companies. Thisis a global industry."

Indeed, some commentators see the new price war as a way to target U.S. shale oil producers, which are already facing greater investorscrutiny after spending big onaggressive growth in recent years.

Canada's oilpatch, on the other hand,enters the frayleaner, more efficient and innovative than five years ago when oil prices hit the skids. In many ways, the Canadian sector is "battle hardened,"Tertzakian said.

"We, here, have really been innovating quite significantly, on average, and are better positioned than we were in 2014 to weather this," he said. "But that's not to say that under $40 is going to be easy to take."

The most important, and most difficult, question to answer is how long will thissituation last.

When it comes tothe dispute betweenRussia and Saudi Arabia, at least there's some history to lean on.

Tertzakian said price wars regardless of the industries involvedhave four phases: thedeclaration ofwar, the weeding out of high-cost participants, capitulation and, finally, a return to normal pricing.

He doesn't expect either side to surrender for probably a quarter or two,but no one can know for sure.

Reuters reportedthe world's top two oil exporters each have war chests ofaround $500 billion to weather economic shocks and are makingbullish noises about their stamina as they square up.

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Moscow said on Monday it could withstand oil prices of $25-$30 US per barrel for 6-10 years. Riyadh, meanwhile, can affordoil at $30 US a barrel, but would have to sell more crude to softenthe hit to its revenue, according to Reuters sources familiar with thematter.

The impact of the coronavirusmight even be more difficult to predict, with stresses on the health-care system, consumer behaviour, trade and the globaleconomy. All those things will affect oil consumption, as demonstrated by the steep drop in oil demand in China so far.

TheInternational Energy Agencysaid this week that it expects global demand to drop this year for the first time since the financial crisis in 2008/2009.

As Alberta's premier,Kenney, said Monday, "We are in uncharted territory."