Oil prices dropped dramatically on Monday with North American stock markets briefly halted shortly after opening — and Canadian energy companies were sold off, hard. As of early Monday, Suncor had lost more than 25 per cent of its value and Cenovus was down by almost half. North American stock markets were halted shortly after opening on Monday morning as circuit breakers designed to slow down panic selling kicked in within minutes. The NYSE, Nasdaq and TSX all hit what's known as a level 1 trading halt within minutes of opening. Such a halt automatically suspends all trading on the market for 15 minutes when there's been a decline of more than seven per cent. A level 2 halt automatically kicks in after a decline of 13 per cent, for another 15 minutes. If the decline hits 20 per cent, a level 3 halt shuts down trading for the rest of the day. The TSX lost more than 1,400 points, or eight per cent, within minutes of opening, so the Canadian index's circuit breaker was triggered. That's the worst day for the TSX since the financial crisis. The trading halts were lifted 15 minutes after being implemented and the selling continued both in the U.S. and Canada — although not by enough to implement a level 2 halt, so far.
Crude price dropped more than 25%
The panic started on Sunday evening after Saudi Arabia kicked off an all-out price war in the oil market, announcing it would be removing any production caps. That move sent the price of crude tumbling more than 25 per cent, and came on top of existing fears over the coronavirus currently spreading around the world. West Texas Intermediate crude fell $11.80 US to $29.48 and international benchmark Brent fell $12 to $33.20.
By Monday morning, Western Canadian Select had plummeted to $22.33 US per barrel. It was the largest single-day drop since the beginning of the Gulf War in 1991. Prices are falling as Saudi Arabia, Russia and other oil-producing countries argue about how much to cut production in order to prop up prices. Demand for energy is falling as people cut back on travel around the world. The worry is that the coronavirus outbreak will slow economies sharply, meaning even less demand. OPEC and key ally Russia failed to agree Friday on a cut to oil production that would have contained the plunge, and on Saturday, Saudi Arabia's state oil giant Aramco slashed export prices.
"We're seeing the outcome of a one-two punch in terms of a demand shock from the coronavirus … and on top of that this weekend's news of a price war started after the breakdown of OPEC plus Russia arrangements," said Blake Shaffer, an assistant professor of economics and public policy at University of Calgary.
Shaffer said the demand-side drop was expected but the more recent development of a price war is a supply-side issue that's hammering the market.
A 'nuclear-sized event' for Alberta
The oil market has seen arguments like this before. In 2014, OPEC held off production cuts in order to hold onto market share in the face of a resurgent U.S. oil industry. That led oil to tumble from over $100 US a barrel to below $40 by 2015.
But experts say this drop is much more dramatic. "This is a really big move. I was an energy trader for 15 years. I don't have all the daily moves in my head, but this would definitely be one of the biggest ones I've seen," Shaffer said. Martin Pelletier, a portfolio manager with Trivest Wealth Council in Calgary, said this is a "nuclear-sized event" for an already-hurting Alberta, and if not contained, the economic malaise could spread to the rest of the country. "This could be the knock-out punch for Alberta, unfortunately," Pelletier said, adding that some companies might not survive the hit. "We're going to really need to see some leadership coming out of Ottawa, and I mean both the Bank of Canada and [Prime Minister Justin] Trudeau and the government … This is a crisis; this is a very serious event."
Pelletier said he'd like to see both a large fiscal spending program tailored to impacted provinces and an emergency rate cut.
The Alberta government's recent spring budget forecasts WTI will average $58 US a barrel in the coming year, and Shaffer said this is bad news both for the economy as a whole and for the province's royalty revenues. "Roughly every dollar [per barrel] is about $350 million to the government … We're talking about a $7 billion decline in revenue expectations," he said, adding that about $2 billion is made up from the improved differential and the Canadian dollar, so the net hit would be about $5 billion. Some experts are predicting even lower numbers could be on the way. Ali Khedery, a former Exxon adviser and now CEO of strategy firm Dragoman Ventures, tweeted "$20 oil in 2020 is coming" after news broke of Saudi Arabia's plans to hike production. Shaffer said seeing such a wide difference in price forecasts after the province's budget dropped just weeks ago makes a strong case for the government to change how royalty revenues are budgeted and push for further economic diversification. "If this is prolonged, you'll see continued job layoffs and effects on families. One of the really important things I'll stress is having an economy that isn't dependent on the outcome of a price war between the Saudis and the Russians … I hope it's yet another wake-up call in terms of the efforts to diversify our economy," he said.