Oil price shock may be short lived, Canada energy chiefs say

(Bloomberg) – The plunge in oil prices over the past week was more severe than the market’s dynamics justify, and the drop may be short-lived, according to Canadian energy executives gathered in Toronto.

Leaders of oil and gas producers as well as pipeline companies characterized the sudden decline — sparked by US President Donald Trump’s global tariffs and OPEC’s surprise decision to revive output more quickly than expected — as more of a shock reaction than a reflection of actual supply-and-demand imbalances.

“I don’t think it’s fundamentals that we’ve dropped on — it’s fear,” InPlay Oil Corp. Chief Executive Officer Douglas Bartole said in an interview at the BMO CAPP Energy Symposium in Toronto. “It’s fear of recession, it’s everything else.”

While the tariff onslaught has the potential to reduce global economic growth and hamper energy demand, consumption isn’t likely to fall off a cliff, executives said. 

“What we learned from Covid is that energy demand is pretty resilient,” said Dean Setoguchi, chief executive officer of natural gas pipeline company Keyera Corp. “The situation now could have had an effect on demand globally, but I don’t think it’s going to be super significant.”

North American supply also may be quick to respond to the drop, they said. West Texas Intermediate prices in the low $60-per-barrel range would likely cause U.S. shale producers, whose rapidly depleting wells require significant investment to maintain output levels, to start to throttle back capital spending and production, said Peter Tertzakian, founder of the ARC Energy Research Institute in Calgary.

WTI closed below $60 a barrel Tuesday, down about 15% since Trump announced his tariff plan.

“We’re in a relatively new oil paradigm, where supply is more elastic to price than it has historically been because of the substantial amount of shale production that has come on,” Tertzakian said. 

Canada’s oil producers are better equipped to withstand the current price drop than during previous downturns after years of working to reduce debt loads and lower production costs. Even oil field service providers, typically among the first firms to get hit when crude prices decline, are better prepared than previously, Tertzakian said. 

“By and large, the industry is more resilient than it was in the past,” he said. 

Oil sands producers are also getting at least a temporary boost from smaller discounts for their heavy crude. Heavy Western Canadian Select traded at $10 a barrel less than WTI on Tuesday, according to a person familiar with the prices. That compares with an average of about $12.70 a barrel over the past 12 months.

The current tightness in the differential is being driven by low western Canadian inventories and maintenance on facilities and may eventually fade, said Jon McKenzie, chief executive officer of oil sands producer Cenovus Energy Inc. and chairman of the Canadian Association of Petroleum Producers. 

However, longer-term factors such as reduced output from Mexico and Venezuela, as well as Canadian producers’ ability to ship crude to Asia via tankers filled by the expanded Trans Mountain pipeline, may keep the discount smaller than it has been in recent years, he said. 

“There’s a general tightness of heavy oil inside North America,” McKenzie said. The differential “probably normalizes at a higher rate, but today it’s very tight and there’s not much inventory in the system.”