No quick fix to save oil prices this time

After a short-lived rebound in energy shares between January and February, the energy sector index (XEG) remains down 35% from its June 2014 high. Interim bounces notwithstanding, it is likely that energy shares have further to fall as investors lose patience and prices couple with the reality of falling oil. Unlike the March 2009 ‘V’-shaped rebound, this time there is little prospect of ‘monetary magic’ to reignite animal spirits. With energy cos still 21% of the Canadian stock market (S&P/TSX), the downside for the broader market looms ominous.

This chart of sector heavyweight Suncor (red) versus the price of crude (WTI in black) offers some insight on the price risk still inherent to date.

Suncor March 23 2015

The collapse in the market for Canada’s heavy crude below $30 a barrel last week is hammering home a harsh reality for the nation’s oil-sands producers: There’s no one to save them this time.

Unlike previous market crashes that were relatively short- lived, the combination of persistent oversupplies and weakening demand are dealing a severe setback to what’s been one of the biggest growth stories in global energy markets. Oil-sands companies such as Suncor Energy Inc. already have been rethinking major developments that can require more than $10 billion in investment. Now even existing projects are barely covering costs or in a losing position…

When the price of Canadian crude fell to similar depths in 2009, U.S. monetary policy helped prevent a financial crisis from deepening and boosted demand for oil, setting the stage for a relatively swift recovery. This time around, there’s no end in sight to the oil glut, leaving companies no choice but to drastically cut costs to survive.

The rule of thumb for new projects in Canada’s oil sands is that a West Texas Intermediate crude price of about $80 a barrel is needed to earn a return. The paste-like fossil fuel from northern Alberta is selling at a discount of about $13 a barrel compared to U.S. crude, which is now well under $50. See: Oil sands tested as rout hammers home harsh reality

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