Global Oil Prices Drop Off a Cliff, Canadian Oil and Gas Follow

The freshly triggered oil price war between Saudi Arabia and Russia has dragged global stock markets down at rates not seen since the 2008 financial crisis, with Canadian stocks hit hard.

The breakdown in negotiations between Saudi Arabia, a member of the Organization of the Petroleum Exporting Countries (OPEC), and ally Russia on curtailing oil production due to the coronavirus has resulted in both countries — two of the top three oil producers in the world behind the US — vowing to increase production when demand is falling.

After news broke on Friday (March 6) that Saudi Arabia and Russia will be flooding the market with oil, West Texas International (WTI) crude plummeted by more than 20 percent to US$32.12 a barrel on Monday (March 9) morning, while Brent crude fell to US$36.55 a barrel.

Saudi Arabia has announced plans to produce 10 million barrels of oil per day in April while offering discounts, and Russia has been refusing OPEC outreach to cut production. Oil prices have already been going for a ride in 2020.

The International Energy Agency (IEA) has released its most recent oil market report with a slashed forecast for oil demand in 2020; demand will be down by 1.1 million barrels per day, as per its analysts.

“We expect global oil demand to fall in 2020 — the first full-year decline in more than a decade — because of the deep contraction in China, which accounted for more than 80 percent of global oil demand growth in 2019, and major disruptions to travel and trade,” the IEA analysts said.

In a note, independent oil analyst Simon Watkins said it is “extremely likely that oil prices will continue to fall,” and that “there is no reason at this stage not to expect oil prices to fall to lower than US$20.”

Analysts at Raymond James said that the developments over the weekend have created “an extremely challenging macro backdrop to the sector” as demand falls and a supply war looms.

“While share prices of oil and gas producers were already facing generational lows, the potential for a sustained period of sub-US$40 oil is almost certainly to result in a flight to (relative) safety within the sector,” they said, adding that they are lowering their ratings for producers across their coverage “until more coverage on the macro environment emerges.”

Among the intermediate Canadian oil- and gas-producing companies that Raymond James lowered its ratings for are Advantage Oil and Gas (TSX:AAV,OTC Pink:AAVVF), which on the TSX was down by 26.98 percent by 11:00 a.m. PDT on Monday; Birchcliff Energy (TSX:BIR,OTC Pink:BIREF), down 23.74 percent; NuVista Energy (TSX:NVA,OTC Pink:NUVSF), down 36.71 percent; Surge Energy (TSX:SGY,OTC Pink:ZPTAF), down 34.67 percent; Vermilion Energy (TSX:VET,NYSE:VET), down by 38.71 percent; and Whitecap Resources (TSX:WCP,OTC Pink:SPGYF), which fell by 35.85 percent.

Senior market analyst at New York-based OANDA Ed Moya said, “The oil price crash will do irreparable damage to the Canadian economy and stock market … Canadians will have to brace for lower prices for the foreseeable future and the oil sector will have to consolidate. Even when virus fears ease, the oil-dependent Canadian economy snapback rally will lag their peers.”

In a note, Wood Mackenzie analyst Tom Ellacott said that the collapse of the oil price “could be the trigger for a new phase of deep industry restructuring,” adding that indebted producers in the US may have no choice but to act soon because of the combination of coronavirus fears and the price war.

“The macroeconomic backdrop is completely unchartered waters for oil and gas companies.”

As of Monday, the COVID-19 outbreak had spread to 110 territories around the world, with more than 110,000 confirmed cases and almost 4,000 deaths. Over 62,000 people have recovered from the virus. 

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Securities Disclosure: I, Scott Tibballs, hold no direct investment interest in any company mentioned in this article.