Canada’s energy sector has weathered storms in recent years. But this one is expected to be worse than 2008 and 2015, according to a Bank of Canada survey released on Monday.
The central bank’s sample of Canadian oil and gas firms paints a dire picture as the dual forces of the COVID-19 demand hit and Saudi-Russian supply shock took hold. The bank conducted the short survey online and by phone between March 12 and March 18.
“The financial health across the sector has deteriorated significantly,” the bank wrote. “The majority of firms viewed the current oil price shock as worse than the episodes of significant oil price declines in 2008 or 2015. This is because accessing financing has been more difficult, and many businesses had been anticipating a bottoming-out in the sector, rather than a negative shock.”
A number of industry observers have said this recent plunge is like nothing they’ve seen, given the issues on both the supply and demand sides, and the unpredictable nature of the unfolding global pandemic.
March was a brutal month for Canada’s energy patch. The price of North American benchmark oil was cut in half. Canada’s primary crude grade fell to US$3.82 per barrel. Billions in planned spending was scrapped. Some firms halted operations.
“On average, companies had revised their 2020 capital spending down 30 per cent compared with 2019,” the bank wrote. “Significant staffing reductions were imminent, especially among oil-field service companies that employ a large share of the sector’s workforce.”
An end to the hostility between Riyadh and Moscow seemed more distant on Monday after a planned OPEC+ meeting was postponed. That dragged West Texas Intermediate (WTI)(CL=F) crude down about six per cent to US$26. Western Canadian Select once again fell below US$10 per barrel.
The majority of companies surveyed said they expect WTI prices to remain depressed for the remainder of 2020, averaging between US$30 and US$35, before recovering to US$40 to US$45 in 2021.
RBC senior economist Josh Nye expects tough times for the energy sector will persist beyond efforts to contain COVID-19 that have reduced demand through slowed business activity and travel.
“This survey highlights the need for policymakers to provide more targeted support to the oil and gas industry,” he wrote in a research note on Monday.
Ottawa has yet to spell out its promised extra support measures for highly at-risk segments of the economy, like energy and airlines. Finance Minister Bill Morneau said on March 25 that more details would be unveiled in “hours, possibly days.”
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.