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Oilpatch reacts to unprecedented oil crash with spending cuts

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CALGARY – Energy fund managers told their clients to take heartburn medication and oil CEOs braced for impact but, in the end, no one was spared from the unprecedented collapse in energy markets this week.

“I don’t feel we were particularly spared,” said Ian Dundas, president and CEO of Enerplus Corp., who saw his company’s share price fall 37 per cent on Monday — a brutal day for the light oil and gas player, but relatively better than some of his competitors, who saw their share prices fall 50 to 70 per cent.

Now, Dundas and his peers are completely reworking capital budgets for the year, reconsidering spending plans and trying to cut costs after oil prices collapsed on news Saudi Arabia would flood the market with oil in its price war with Russia.

“We, like everybody else I know, are re-examining our spending plans with a downward bias,” Dundas said Tuesday, adding the company was moving swiftly on its spending review. “I think moving slowly in this is not a good plan.”

On Tuesday, Saudi Arabia announced it planned to produce 12.5 million barrels of oil per day next month, up from 9.7 million bpd in March, while it also cut prices for its crude to undercut Russia. In response, Russian Energy Minister Alexander Novak said Tuesday his country could increase its oil output by 500,000 bpd.

Caught in the crossfire are Canadian and U.S. oil producers, who are already reviewing their spending plans.

Late Monday, Cenovus Energy Inc. responded to its 52 per cent share price drop on the day by slashing spending, cutting its crude-by-rail program and reducing its planned production for the year.

“Consistent with our commitment to balance sheet strength, we’re exercising our flexibility to reduce discretionary capital while maintaining our base business and delivering safe and reliable operations,” Cenovus CEO Alex Pourbaix said in a release.

Cenovus, which climbed nearly 12 per cent Tuesday to $4.27 per share to pare back some losses, announced the company would spend between $900 million and $1 billion this year, down from between $1.3 billion and $1.5 billion.

Other producers including Whitecap Resources Inc., Journey Energy Inc., Tamarack Valley Energy Ltd. have all deferred planned spending.

“Companies overnight have gone into survival mode,” said Eric Nuttall, partner and senior portfolio manager with Ninepoint Partners in Toronto, whose fund is focused on the energy sector.

Nuttall’s trading screen turned bright red on Monday as energy companies tumbled along with oil prices, marking the biggest oil market correction in decades — worse than either the 2014 oil price crash or the 2008 financial crisis.

Companies overnight have gone into survival mode

Eric Nuttall

“It was my worst day by far,” he said. “When across the board, names are down 30, 40 or 50 per cent, there’s only so much you can do. You can take advantage of selling the weak to buy the strong.”

Nuttall said he was active on Monday, selling off a U.S. shale oil company to buy a Canadian oilsands producer, which he declined to name as he’s restricted on it for a few days after a trade.

Other fund managers also signalled they consider Canadian oil and gas companies better prepared for the current downturn than some U.S.-headquartered producers.

“We still favour Canadian companies over U.S. companies — we think Canadian companies will weather this storm a lot better,” BMO Capital Markets managing director and chief investment strategist Brian Belski told the Financial Post in a video interview.

He said that many Canadian companies have “found religion” around controlling spending in recent years, which has led to more debt repayments, better balance sheets and reduced costs.

“We don’t think it’s time to sell energy, we think it’s time to be a little more prudent in our energy picks, especially in the United States because United States companies have actually been spending more money,” Belski said.

Enerplus’s Dundas said he believes his company has entered this period in a relatively healthy financial position. He said Monday’s drop was “an unprecedented shock, but we’re in a good starting place.”

Data from CIBC World Markets shows Enerplus’s debt-to-cash flow ratio was 0.9 at the end of 2019, meaning the company could repay its debt in under a year at 2019 pricing and cash flows.

“The only thing that matters now is balance sheets,” said Jennifer Rowland, with Edward Jones in St. Louis, adding that Monday’s oil market rout was particularly hard on companies with higher debt levels.

“Anybody that’s carrying more debt than they should be was punished more,” she said.

U.S. crude rebounded nearly 8 per cent to US$33.89 Tuesday morning after falling 25 per cent Monday — but nobody expects the market to return to normalcy amid a showdown between Riyadh, Moscow and U.S. shale producers.

Western Canada Select, the heavy oil benchmark price that most oilsands producers receive for their production, rose slightly to US$20.14 per barrel on Tuesday according to Bloomberg. By contrast, WCS traded at US$32.49 per barrel a month ago on Feb. 10.

The uncertain forecast and volatile prices mean capital and operational expenditure of exploration and production companies will likely be cut by US$100 billion in 2020 and another US$150 billion in 2021 if oil prices remain around US$30 level, according to Rystad Energy.

“Unfortunately, this volume war, if it continues throughout 2020 and 2021, will lead to a massive wave of bankruptcies and consolidation in the service market, whose debt obligations are set to grow 27 per cent into 2021,” said Audun Martinsen, Oslo-based head of oilfield service research at Rystad. “Companies with low leverage and with healthy order books from past wins in 2018 and 2019 will be able to steer through the storm.”

The only thing that matters now is balance sheets

Jennifer Rowland

RBC Capital Markets believe nearly a million barrels a day of demand growth will be destroyed this year, if oil remains in the US$30-40 barrel range. It’s RBC’s base case, with a 40 per cent probability.

RBC’s bear case however, also has a 40 per cent probability. And it entails Saudi Arabia and Russia ramping output, but resilient U.S. producers still managing to crank out substantial output for sometime to come.

Rory Johnston, managing director and market economist at Price Street, a Toronto-based market research firm, said the Saudis planned to send “an astronomical amount” of oil into the market beginning next month, which will create a supply shock in the market, which had already been grappling with a contraction in oil demand as a result of the outbreak of the coronavirus.

“It’s a historic move to have an outright demand contraction along with a price war,” Johnston said.

However, Johnston also noted that oil prices partially rebounded on Tuesday on news that the Saudis planned to send more oil into the market than they can physically pump.

He said most economists believe that the Arab country’s total production capacity is around 12 million bpd, so plans to sell 12.5 million bpd beginning in April implies they will be drawing oil out of storage to flood the market.

“They can’t keep that production level going indefinitely,” he said, indicating there is some hope in oil markets the supply-side shock will be brutal but short-lived.

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The OPEC Meeting Could Send Oil Prices Crashing Below $10 – OilPrice.com

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The OPEC Meeting Could Send Oil Prices Crashing Below $10 | OilPrice.com

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle…

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    OPEC Meeting

    The current optimism of analysts and the media that an end to the ongoing OPEC+ oil price spat is near is entirely unjustified. The ongoing oil market volatility, the battle between leading producers for market share, the logistical impossibility of enforcing U.S. production cuts, and the continued demand destruction caused by COVID-19 are not issues that can be solved by an OPEC meeting. Immediately after Trump’s latest OPEC twitter offensive, Saudi Arabia and Russia came out with critical statements about the impact and influence of the US president on the matter. While Putin and Mohammed bin Salman are reluctant to bash Trump, the real power when it comes to the oil market does not lie with the U.S. President. The tweet by Trump claiming that MBS and Putin would agree to a 10+ million bpd production cut shows not only his overestimation of his own power over the two countries, but also shows a lack of knowledge about the underlying market fundamentals and the current demand destruction worldwide. 

    As former US president George W. Bush stated during his election campaign, which did not end well as we know, “it’s the economy stupid” that matters in the end. Trump’s tweets and general approach to this matter suggests he and his administration are out of touch with reality. Even if a Saudi-Russian combination would cut 10 million bpd, the oil price reaction would be minimal and very short-lived. At present, leading oil market experts such as Vitol, Trafigura and Goldman Sachs are warning of a total demand destruction of 20 million bpd or more. When looking at the cuts in global refinery runs, we have already hit levels of -17 million bpd or more. Downstream companies are cutting back on all production as demand from industry and consumers worldwide collapses. Lockdowns in more than half the world are having a major impact, hurting demand for oil, gas and other kinds of energy. Cutting 10+ million bpd of production is not a real solution and it could even cause markets to react negatively. When production cuts fail to send oil prices up, the fear in the market could hit historical highs, causing oil prices to fall to levels below $10 per barrel in the coming weeks. 

    Related: $1 Oil: Saudi Arabia’s Attempt To Crush U.S. Shale The upcoming “OPEC+ and Friends” meeting is going to be a very tricky one. There is the very real possibility of the meeting failing as the targets that have been set are totally unclear. Saudi Arabia, probably supported by Abu Dhabi, called an emergency meeting, not only of OPEC+ members but of all oil-producing nations. That means that, at least according to Western media, the US is invited and will likely attend. In inviting the U.S., it seems that Saudi Arabia has called Trump’s bluff because by attending the meeting Washington will be implicitly stating that a possible production cut agreement would include the US. When looking at the US upstream oil and gas sector there is one thing you can state without any analysis….Washington and US oil and gas operators are not on the same page. Suggestions of Washington being able to control or even force US oil to cut production, even via legislation, are ludicrous and would end in a mammoth legal battle. Even if only Texas representatives attend, oil companies will be unlikely to comply, it is simply not in the US oil and gas DNA to work together on an international level. Free market economics is a cornerstone of U.S. society and business. 

    The second major threat at the Monday meeting is that Saudi Arabia not appear to be at all convinced that it needs to change its current tactics. Its targeted goals of regaining market share, forcing Russia to come to the table and bringing non-OPEC producers such as U.S. shale to their knees are working well. Several Saudi officials have stated that they are willing to discuss a new agreement but only under the conditions that potential production cuts will be on the shoulders of all, not only Saudi Arabia, Russia, and UAE. In this light – Trump’s demand for a more than 10 million bpd cut from Russia and Saudi Arabia is unrealistic, to say the least.

    Russia’s position has, until now, remained unclear. While Putin is still acting as though he has nothing to worry about, Russian oligarchs and the Russian leader are happy to debate any options that are on the table. For Russia, the current position taken by Trump is being seen as an opportunity to get some gifts from the U.S. very soon. Russia might consider cooperation with the U.S. if Washington agrees to bring an end to Russian sanctions. But that is not as important to Moscow as a strong relationship with Riyadh and OPEC going forward. Future opportunities with Saudi Arabia are more attractive to Putin than a positive relationship with a President that may not be re-elected this year. 

    While all eyes will be on Washington, Riyadh, and Moscow in the coming day, there is a fourth group that is going to be vital at Monday’s meeting. In order to reach a 10 million bpd cut, OPEC will have to convince all other oil-producing countries to contribute. At present, convincing such a large list of independent nations to join these efforts seems unrealistic. Countries such as Libya, Iran, Iraq, Brazil, and Canada, are unlikely to agree at present to cut production. This is yet another reason that the OPEC meeting will likely fail on Monday.

    Related: An Oilman’s Plea To President Trump

    The real fear for markets at the moment should be sentiment and expectation. After Trump’s tweet cited a 10-15 million barrel per day cut, oil prices have soared and anything less than that will be seen as a failure. After what is looking set to be a fairly quiet weekend for energy markets, a Monday failure with plenty of media attention is likely to drive markets into a frenzy. This fear, combined with continued demand destruction could serve as a serious problem for oil markets next week. 

    With this in mind, the rational short-term approach of OPEC+ should be, especially for Riyadh and Moscow, to not move at all. Don’t increase production, stand on the quay and watch the US shale and non-OPEC VLCCs fill oil storage to the brim. If OPEC+ cuts without the assistance of other nations it will lose future leverage and markets may crash anyway.  By doing nothing, Saudi Arabia and Russia can maintain the illusion that a production cut from OPEC+ would save markets.

    By Cyril Widdershoven for Oilprice.com

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      CIBC, RBC cut credit card rates to give relief to customers amid COVID-19 pandemic – Financial Post

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      Royal Bank of Canada and Canadian Imperial Bank of Commerce said on Friday they are cutting interest rates on credit cards to provide relief to customers as the economic fallout from the COVID-19 pandemic deepens.

      Royal Bank will reduce credit card interest charges by 50 per cent for clients receiving minimum payment deferrals, Canada’s biggest lender said in a statement.

      CIBC personal credit card users who request to skip a payment will get a temporary lower annual rate of 10.99 per cent, Canada’s fifth-largest lender said in a separate statement.

      Most Royal Bank and CIBC credit cards charge 19.99 per cent interest on purchases.

      Canada’s six biggest banks unveiled a mortgage-relief plan two weeks ago to allow homeowners to defer or skip mortgage payments for up to six months as businesses come to a grinding halt due to the pandemic.

      Since the mortgage-relief plan was announced, the banks have received nearly half a million requests that have been completed or were being processed.

      © Thomson Reuters 2020

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      Has Russia Reached Its Limit In The Oil Price War – OilPrice.com

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      Has Russia Reached Its Limit In The Oil Price War? | OilPrice.com

      RFE/RL staff

      RFE/RL journalists report the news in 21 countries where a free press is banned by the government or not fully established. We provide what many…

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        Russia Oil Price War

        When Vladimir Putin was given a dire forecast of the economy under the cloud of a crippling coronavirus pandemic and a sharp fall in global demand for petroleum, the Russian president was much less bullish about his country’s prospects in a price war with oil-producing rival Saudi Arabia. “For our economy, yes definitely, this is a very serious challenge,” Putin told Audit Chamber head Aleksei Kudrin on April 1, adding that the United States, which recently surpassed Russia and Saudi Arabia to become the world’s largest oil producer, would also suffer.

        It was a big step back from the line being floated just two weeks ago when, despite Russia’s economic dependence on natural resources, Moscow engaged in a bit of chest-thumping about its chances in a price war, arguing that Russia was in a stronger position than its main competitors to ride it out.

        But that was before the true impact of the coronavirus on the global economy was understood, and before Kudrin — a former finance minister and trusted ally — told Putin in a government meeting held by video that the Russian economy could decline this year by between 3 and 5 percent.

        And that was a moderate outlook, according to Kudrin, who went on to warn that the situation could be as bad as the nearly 8 percent decline the country suffered in 2009 during the financial crisis.

        When faced with slumping oil demand as the global economy suffered from the effects of the coronavirus pandemic, Riyadh’s demands for output cuts were refused by fellow OPEC+ member Moscow. After walking away from the table, the Saudis instead took the surprising route of increasing oil output, causing the largest one-day drop in prices in nearly three decades.

        Putin’s comment is one sign that Russia, which always expressed openness to continue negotiations with Riyadh, may be keen on coming to an agreement. “Today’s acknowledgement by Putin shows Russia is interested in the dialogue process and wants to go ahead with it,” Rauf Mammadov, an energy analyst at the Middle East Institute in Washington, told RFE/RL on April 1.

        High-Stakes Game

        From the beginning, the price war has raised questions about who would cave first: Moscow, Riyadh, or U.S. production, which depends on shale-oil producers that have gained market share at the expense of Russia and Saudi Arabia but require higher oil prices to stay in business.

        Russia is now preparing to ramp up spending to support millions of citizens and thousands of companies affected by quarantines and shutdowns. The Kremlin has thus far announced an increase of spending by $17.5 billion to counter the outbreak.

        Related: $1 Oil: Saudi Arabia’s Attempt To Crush U.S. Shale But according to Kudrin, the country may need to spend 5 percent of gross domestic product — or about $70 billion — to combat the impact of the coronavirus, which Russia has officially said has infected more than 3,500 people, but which skeptics suggest is a low-ball figure.

        Those costs will be difficult to cover if oil prices are low — but on April 2, the price of Russia’s Urals crude blend fell below $11 a barrel, the lowest since Putin came to power two decades ago. The international benchmark Brent crude, meanwhile, was going for just over $26 a barrel on April 2, whereas Russia depends on a price of about $40 a barrel to balance its budget.

        Russia as of March 20 had $551 billion in foreign-currency reserves at its disposal, although economists suggested that Putin would prefer not to tap into them. In just one week, however, those reserves had already fallen by $30 billion.

        Even before Putin’s government meeting, there were signs that Russia was having second thoughts about engaging in a price war with Riyadh, with Energy Minister Aleksandr Novak saying earlier on April 1 that Russia would not increase oil production in April, a reversal of earlier comments by officials.

        Analysts have said that Saudi Crown Prince Muhammad bin Salman’s surprise decision to increase oil production was intended to get Putin back to the negotiating table.

        And there is reason to believe that the Saudis might not want to keep the price war going either. Like Russia, the sharp decline in the price and volume of oil threatens Saudi Arabia’s aggressive spending programs aimed at lifting living standards and diversifying its economy.

        But Riyadh needs a much higher Brent crude price to balance its budget, nearly $80 per barrel, analysts have said. And while Saudi Arabia has $480 billion in foreign-currency reserves to lean on, it has already announced $13 billion in spending to deal with the lower budget revenue.

        “Despite the bravado that we have been hearing on both sides, this is not about who has the lowest cost of production and higher profitability. This is about funding budgets, and for both Russia and Saudi budget expansion has been significant in recent years,” Chris Weafer, the co-founder of Macro Advisory in Moscow, told RFE/RL on March 28. “The reality is that both of them need a deal to put a better price support in place.”

        Trump Wants A Deal

        The other oil-producing elephant in the room is the United States, which has seen its shale-oil producers suffer as a result of the price dispute.

        U.S. President Donald Trump, who has called the price war “crazy,” has been trying to accelerate talks between Russia and Saudi Arabia while members of Congress have been calling for sanctions and tariffs if they don’t find an agreement.

        Related: An Oilman’s Plea To President Trump

        Trump has said he recently spoke with the leaders of both countries and that Moscow and Riyadh were “going to get together” but he gave no further details. He expressed optimism on April 1 that an agreement was near.

        “I think that Russia and Saudi Arabia, at some point, are going to make a deal in the not-too-distant future because it’s very bad for Russia. It’s very bad for Saudi Arabia,” Trump said.

        The U.S. president reiterated that hope on April 2, saying in a tweet that he expected Russia and Saudi Arabia to cut 10 million barrels a day, though it was unclear if he was referring just to the two countries or to OPEC+, the alliance of two dozen oil-producing states that Moscow and Riyadh lead. It was also unclear if U.S. companies would be involved in the output cut.

        Just minutes after Trump’s tweet, Saudi Arabia called for an emergency meeting of OPEC+ members.

        Macro Advisory co-founder Weafer said he expected Moscow and Riyadh to find a short-term solution to their dispute that would get them through the crisis period.

        The Middle East Institute’s Mammadov suggested that Russia and Saudi Arabia could reach an agreement with other countries through the Group of 20 (G20) format, as it would offer both Putin and Prince Salman a way to claim victory. “It would eliminate the face-saving confrontation between Saudi Arabia and Russia because it’s not about the old OPEC+ deal” that they fought over, he said.

        Trump will meet with U.S. oil executives on April 3 to discuss measures to support the domestic market, including possible tariffs on oil imports from Russia and Saudi Arabia as well as American production cuts.

        Analysts have said that Riyadh and Moscow will want to see U.S. producers share the burden of stabilizing the market by cutting supply.

        By RFE/RL

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