Oil tumbled to five-year lows amid escalating fears of global oversupply, forcing more Canadian producers to slash budgets as they brace for an extended period of weak prices.
Oil’s decline has also hammered Canadian energy shares across the board, and on Monday pushed the S&P/TSX composite index down 2.3 per cent. The capped energy index dropped 6.5 per cent.
Prices have been falling for five months as major energy countries engage in a standoff over production and market share. The Organization of the Petroleum Exporting Countries last month refused to cut its output and offer support for global prices, sending oil into a tailspin from which it has yet to recover.
U.S. benchmark West Texas Intermediate crude dropped $2.79 to $63.05 (U.S.) a barrel in New York on Monday, while global benchmark Brent crude fell $2.88 to $66.19.
The dramatic drop comes as a number of key Canadian energy projects are hobbled by opposition from environmentalists, regulatory delays and economic uncertainty. The developments include natural gas-export schemes proposed for Canada’s Pacific coast, as well as major pipelines, such as Energy East and Keystone XL, that supporters say would boost the value of Canadian oil.
The sudden collapse in oil prices, from more than $100 in the summer, is set to wash through the Canadian economy in the coming months, hitting the energy industry and Alberta’s government revenues in the west, but giving consumers across the country a break on gasoline prices. On the whole, it’s likely to act as a drag on the country’s modest economic growth in recent years, since the vibrant energy scene was one of the few bright spots nationally.
Bank of Canada Governor Stephen Poloz last week warned oil’s decline would restrain growth in 2015 by a third of a percentage point, but he did note the strong U.S. economy and lower Canadian dollar are giving the economy a boost.
Worries about oil prices have triggered reminders of the Great Recession. A recent report by the investment bank Morgan Stanley said oil prices now face “their greatest threat since 2009,” when $30 oil forced major project cancellations and delays in high-cost regions such as the oil sands.
The firm said Brent crude could touch $43 a barrel before recovering in the second half of 2015.
The drop in oil prices has dampened enthusiasm for promising shale plays, particularly the Duvernay and Montney in Alberta and British Columbia.
Now, companies ranging from Precision Drilling Corp. to major energy producers such as ConocoPhillips Co. are bracing for reduced activity in Western Canada.
“People are starting to realize that this little price war is not going to go away any time soon, and I think you’re seeing a lot of people give in to the fact that this is going to lead to an oversupply for the short term and there’s no end in sight,” said Phil Flynn, futures account executive at Price Futures Group in Chicago.
Precision Drilling, Canada’s largest oil-field services company and a major player in the United States, on Monday lowered its 2015 budget to $493-million (Canadian), down from the $885-million it expects to spend this year. The Calgary-based company expects customers to order fewer drilling rigs.
“It reflects the lack of customer orders for new builds, which are a result of falling oil prices,” said Kevin Neveu, the company’s chief executive.
ConocoPhillips, one of the world’s largest oil and gas firms, on Monday said it will “defer significant investment in the emerging North American unconventional plays.” It put the Montney and Duvernay on this list, as well as Texas’ Permian basin and Colorado’s Niobrara play. The Houston-based company announced the delay as it unveiled its $13.5-billion (U.S.) budget for 2015, down roughly 20 per cent from this year’s plan.
Calgary’s Trilogy Energy Corp., a Duvernay player, scrapped its monthly dividend of 3.5 cents per share “in order to preserve cash flow for ongoing operations given the current market environment,” it said Monday.
Vermilion Energy Inc., which is based in Calgary but operates internationally, slashed its 2015 budget to $525-million, down $150-million from its 2014 capital plan.
“I think people are preparing for the worst and hoping for the best,” Lorenzo Donadeo, Vermilion’s chief executive officer, said in an interview.
JEFF LEWIS AND CARRIE TAIT
CALGARY — The Globe and Mail
Published Monday, Dec. 08 2014, 10:19 PM EST
Last updated Tuesday, Dec. 09 2014, 5:52 AM EST