Canadian crude oil and the S&P/TSX Capped Energy Index fell about 20 per cent on Monday after Saudi Arabia instigated a price war with Russia, causing the biggest daily oil rout since the 1991 Gulf War.
Western Canadian Select crude, the chief grade produced in Canada’s energy patch, dropped to US$22.05 per barrel as prices for the North American and global benchmarks tumbled.
Cenovus Energy (CVE.TO)(CVE) was among the hardest-hit Canadian producers, with shares dropping as much as 48 per cent in early trading. MEG Energy (MEG.TO) fell more than 40 per cent, and Vermillion Energy (VET.TO)(VET) fell about 30 per cent. Shares of Ovintiv (OVV.TO)(OVV), formally Encana, fell more than 60 per cent.
Saudi Arabia fired the opening salvo in this latest oil price war, slashing its official selling prices and announcing plans to ramp up production. The move followed Russia’s refusal to go along with production cuts proposed by Organization of Petroleum Exporting Countries (OPEC) over the weekend.
West Texas Intermediate (CL=F) plunged as much as 34 per cent to $27.38 per barrel in overnight trading.
Crude prices were already depressed by concerns about COVID-19. China, where the deadly global outbreak originated, is the world largest importer of the commodity. Early data show the virus led to a significant slow-down of the world’s second-largest economy, disrupting business activity and reducing travel.
Jackie Forrest, senior director at the ARC Energy Research Institute in Calgary, said the discount on heavy Canadian crude means the looming price war will have an amplified impact on Canada’s oil sector.
“It's a massive fall in price,” she told Yahoo Finance Canada on Monday. “We're getting close to the cash-flow break-even for some companies.”
Forrest said unlike the 2015-2016 oil price crash, “unique circumstances” presented by COVID-19 are compounding uncertainty around the supply and demand imbalance.
“We are once again in unprecedented territory for many in the oil and gas industry,” Stifel FirstEnergy analyst Ian Gillies wrote in a research note on Monday.
Lower for longer
Russia has made no secret of its concern about the growth of U.S. shale oil, and sees OPEC’s cuts as effectively giving up market share to the Americans, according to Caroline Bain of Capital Economics.
She said Saudi Arabia’s decision to cut the price of its April oil deliveries to Asia, and to increase output over 10 million barrels per day, represents a shift from attempting to balance the oil market to protecting the Kingdom’s market share.
“The dramatic slump in prices over the weekend is consistent with our new forecast of a sizeable market surplus,” she wrote on Monday. “We now think that prices will stay lower for longer, which is in line with moves in the oil futures curve.”
Oil stocks that could weather the storm
Chris Cox, an analyst with Raymond James, notes this latest crude price drop clearly signals a supply war is underway. He said the situation recalls the infamous November 2014 OPEC meeting, where a similar spat over supply erupted.
Raymond James lowered its ratings on 14 Canadian energy stocks, leaving only five exploration and production companies within its coverage universe with an “outperform” rating. Those include Suncor (SU.TO)(SU), Canadian Natural Resources (CNQ.TO)(CNQ), Tourmaline (TOU.TO), PrairieSky Royalty (PSK.TO) and Freehold Royalties (FRU.TO).
“All five names exhibit industry-leading break-even levels, strong balance sheets and, in the cases of SU, CNQ & TOU, could be well positioned to potentially acquire marquee assets at distressed levels,” Cox wrote. “As for the royalty names, the relative lack of operating leverage and strong balance sheets allows these names to weather the coming storm far better than more traditional exploration and production business models.”