Prices fall 20%, creating concerns some companies may trim capital spending plans.
June 4, 2012
by The Canadian Press
OTTAWA: The downward slide of oil prices may lead some companies to trim their capital spending plans, but analysts suggest the bigger projects are not in jeopardy, at least not yet.
The price of oil as fallen roughly 20% from its highs of the year amid rising concerns about the strength of the global economy and falling worries about political unrest in the Middle East.
The plunge has raised questions about the future of the billions of dollars worth of projects on the books for both the conventional oilpatch in Canada and the oil sands.
“We may not yet be at the level yet where it leads to a large negative impact on the energy investment side, nevertheless if it were to go down another $10 we might start to see that,” CIBC senior economist Peter Buchanan said. “It certainly could affect future developments, but I believe the last time when there was some talk of that, it was around $75 or so.”
West Texas Intermediate, the benchmark for oil in the US fell US$3.30, or 3.7%, to $83.23 per barrel Friday, the lowest price since early October. Meanwhile, Brent crude, which is used to price international oil, lost $3.44, or 3.4%, to $98.43 per barrel, its lowest price since January 2011.
Buchanan called it a “perfect storm” of circumstances amid weaker than expected economic news from the U.S. and China as well as the European financial crisis, which threatens another recession on the continent.
But, he said, it isn’t all bad news for Canada.
“(Low oil prices) are certainly a plus for consumers and I know I’m going to rush and get my car filled up fairly soon after I get off work. So it does translate into more disposable income which is a plus for all of the country,” he said.
“Oil prices in the $80s and $90s are not really a bad situation for the Canadian economy in some sense because they are high enough to ensure that energy development goes ahead, but they are not so high that they kill the consumer.”
Buchanan added that lower oil prices will help the struggling US economy, the biggest market for Canadian exports.
While the major projects may not yet be affected by the drop, Trevor Reynolds, an analyst at Acumen Capital Partners in Calgary who follows junior energy companies, said smaller firms may be starting to look at trimming spending.
However, he said that companies aren’t in trouble yet.
“You’re still looking at very decent oil price,” Reynolds said. “There is still a high rate of return on most projects at these oil prices.”
He noted many of the smaller companies have hedged their oil production at higher prices than those seen in recent days, offering some measure of shelter from the slide.
“A good portion of the guys that we looked at did lock in hedges.”
But just how far oil may slide, nobody really knows.
“That’s of course the million dollar question here. Certainly in the past when we’ve seen oil start moving in one direction it tends to persist for a while,” Buchanan said.
©The Canadian Press