Canadian crude plummets to US$5 a barrel as oilpatch awaits federal bailout - 2020-03-27
As the oilpatch awaits a bailout from the federal government, the price of Canadian crude plunged to a new historic low of US$5 per barrel Friday. The industry has been left staggering in recent weeks thanks to the double whammy of the COVID-19 pandemic, which has sent global markets into a tailspin, and a price war between Saudi Arabia and Russia. Now a barrel of Western Canadian Select (WCS), the Canadian benchmark, is going for roughly the same price as a Big Mac. "This is really unknown territory," said Warren Mabee, the director of the Institute for Energy and Environmental Policy at Queen's University.
The abrupt spiral of the oil and gas sector, which contributed 11 per cent of Canada's gross domestic product in 2018, has broad and dire consequences for the federal and Alberta economies. Already, oil producers are cutting spending plans and analysts are forecasting that production will need to be slashed, with WCS closing at US$5.06 per barrel Friday. The drop blows a hole in Alberta Premier Jason Kenney's budget, which relied on optimistic forecasts of $58 per barrel. On Friday, Kenney told Albertans to expect "what will likely be the largest single contraction in our economy in history," and recalled the legislature for Tuesday to discuss ways to offset the economic blow. In Calgary, where many Canadian oil and gas companies are headquartered, the sector is in "survival mode," said Sandip Lalli, the president and CEO of the city's chamber of commerce. "The price per barrel does carry a sentiment in town," she said in an interview Friday. "Five dollars? Nobody wants that." Mabee said he wouldn't be surprised if Canadian crude prices briefly go negative — a scenario where producers are paying people to take away product. And there's likely a long way to go before markets begin to rebound, he added.
"For some companies, unfortunately, it will be a death blow," Mabee said. "They won't have the money to continue with their operations … For big companies, it definitely requires major restructuring." Industry's hopes are currently riding on the multibillion-dollar federal funding package, set to be unveiled any day now. Details haven't yet been released, but Mabee said it's likely aimed at preserving jobs and helping companies stay afloat until the crisis subsides — whenever that may be. How did we get here? Canadian oil already sells at a discount compared to the North American benchmark, West Texas Intermediate. That's because it's harder to process, and must be transported much farther by rail or pipeline to reach refineries that can handle it. And the Alberta oilpatch was already coming off a rough couple of years. In 2012, Canadian crude sold for over US$100 per barrel; since the last price crash in 2015, it has rarely fetched more than $50. Long-term, carbon-limiting policies meant to address the accelerating climate crisis will mean tremendous change — and likely decline — for the oil and gas industry, analysts say. But the oilpatch had also hailed 2020 as a tentatively positive year, forecasting a boost to crude prices. Then came the price war. With demand for oil falling as economies around the world ground to a halt to battle the COVID-19 pandemic, Saudi Arabia and Russia began a price war earlier this month when they couldn't agree on production cuts. Both countries are now flooding the market with excess supply, causing prices to take a dramatic dive.