Oil price war will last months, experts say, adding 'pain' to Canada's oilpatch

In the two weeks since an oil price war broke out between Russia and Saudi Arabia, crudeprices have plunged to their lowest levels in years, hammeringCanada's oilpatch all the way down.

But for all the financial strain inflicted so far by the dispute, experts say there are still months yet to come and, while there may be no winners, it could produce many losers.

"In principle, I don't think anyone can win this war," said Ayham Kamel, head of Eurasia Group's Middle East and North Africa research team.

"It might not be even the Russians or the Saudis that lose this war. It could be U.S. and North American oil producers that suffer the most pain."

Making matters worse, the dispute comes as oil consumption is being crushed by the novel coronavirus pandemic, a situation that could soon turnthe price war into a sideshow.

"This ultimately is akin to two bald men fighting over a comb,"said Bill Farren-Price, a director withRS Energy Group in London, now part of Enverus.

"This is the worst possible time to have price war in the midst of a demand-side shock, which is what we're seeing from coronavirus."

A fight over market share

Saudi Arabia, the de facto leader of OPEC,and Russiabecamelocked in a war for global oilmarket share after their three-year deal to restrain outputcollapsed in early March.

With global oil demand fallingbecause ofthe coronaviruspandemic, OPEC wanted to deepen supply cuts but Moscowsaid it would agree only to an extension to the existing pact.

The kingdom has since vowed to increaseproduction to a record 12.3 million barrels per day, and haschartered numerous tankers to ship oil around the world.

While Russia had agreed to restrain outputin recent years, analysts say it had grownfrustrated that propping up prices was helpingshale oil productionin the United States.Lower prices, meanwhile, could drive out high-costproducers.

"I think Russia found an opportunity to balance the market in different ways,"Kamelsaid.

Saudi Arabia's aggressive planto open itstaps is viewed as one aimed at pushing Russia back to the negotiating table, but observers cautionitwon't be easy to get Russian President Vladimir Putin to blink first.

Both sides girdfor a long fight

On Friday, the price of West Texas Intermediate (WTI), the North American benchmark, closed at $22.53 US a barrel capping a remarkable 29-per-cent drop for the week. Brent crude, the global yardstick, fell 20 per cent in the week to close at $26.98 US a barrel.

Such low prices will put a strain on Russia and Saudi Arabia.

According to BloombergNews, the Russian government's budget breaks even at a price of $42 US a barrel.Moscow has said, however,it could withstand prices of $25-$30 US per barrel up to 10 years.

Farren-Price saidthe general view is Saudi Arabia'sbudgetrequires a Brent price closer to $80 US a barrel, thoughreports sayRiyadh couldaffordoil at $30 USbut would have to sell more crude to softenthe hit to its revenues.

Though both countries facebudget deficits,each country alsohaswar chests ofaround $500 billion to weather economic shocks, according to Reuters.

While Russia's advantage may be that its economy is more diversified, Saudi Arabia has the capacity to put a lot more oil onto the market. But everyonehurtsat these prices, Farren-Price said.

"That said, I don't see any prospect that Saudi Arabia will step back from what is a pretty strong position that it's laid out. And I don't see the Russians coming back to the table with a tail between their legs."

He thinks movement is unlikely, at least in the next three to six months.

Canadian operatorsfeelthe strain

Few observers appear to expect a quick resolution to the price war.

Rather than wait things out,U.S. officials said Friday the Trumpadministration plans to send a special energy envoy to Saudi Arabia to work with the kingdom on stabilizing the global oilmarket.

Kamelthinks it's going to take more economic pain and revenue lossto get Russia or Saudi Arabiato move. He thinks it could take upto a year and a half for theprocess to take place and for new balances in the market to emerge.

But things are happening fast in North America.

Last Wednesday, theprice of a barrel of Canadian oilsands crude oil fell to its lowest level ever. Canadianproducers are also hunkering down andslashingthis year'sspending plans.

Energy economist Peter Tertzakian told CBC Newsthis month Canada'soil sectorbegins to feel financial strain when WTIprices fall below $40 US a barrel, though it varies by company.

The price slump has beendevastating to U.S. oil producers, too, some of which havebegun putting employees on furlough. Even Texas isweighing curtailment for the first time in decades,according to TheWall Street Journal.

With the pandemicchoking economic activity and oil supply increasing, the world is looking at the"possible buildup of the most extreme global oil supply surplusever recorded," IHS Markit said in a report last week.

Kamel said Canadian oil production isn't the target of the price warbut he expects it will be a casualtyduring the dispute.

"Ithink you end up with both the American producers and Canadian producers suffering, or ...forced to cut production given their high costs," he said. "High-cost producers will find it very difficult to deal with this current environment."

He said it's not yet clear how difficult things could get for Canada's oilsector, addinggovernments can provide support.It's been reported Ottawa is to reveal its strategy for helping the sector shortly.

"But they cannot do it indefinitely," Kamelsaid. "Until it becomes clear where the global economy is moving toward in 2020, it won't be clear to us how bad the damage is."