'Batten down the hatches': Oilpatch braces as prices plummet

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.

Brent crude, the global oil benchmark price, had its biggest daily percentage loss in more than 11 years on Friday, down $4.72 US, or 9.4 per cent, to settle at  $45.27 US a barrel. 

The benchmark crude contract in North America, West Texas Intermediate (WTI), closed down 10 per cent on Friday, dropping $4.62 to $41.28 US per barrel. It was its worst drop in more than five years.

Brent and WTI are both down over 30 per cent so far in 2020.

'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.

At oil prices as low as they were on Friday, she said, the industry does not make money. Over time, that might mean gasoline will cost a little less at the pump, but it could also mean layoffs and even bankruptcies.  

"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 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."

Western Canada's oilpatch had been hoping for a better year, especially with recent progress on three key pipeline projects. But the shelving of a major oilsands project and now struggling oil prices are again heightening uncertainty. 

Tristan Goodman, president of the Explorers and Producers Association of Canada, whose membership represents a fifth of the oil and gas production in the country, said there is significant concern about where oil prices are headed.

Though he thinks oil markets have "partially" overreacted to the news, it will take time understand the true impact.

"We have to sort of give this a few weeks to figure out, OK, how is this really going to impact the global economy?"