- Smart Investing
What’s Happening to Oil Prices?
While the Covid-19 crisis has been affecting everything in the economy and the world, the oil price story has been interesting and devastating for oil producing companies and provinces across Canada. Essentially, the oil industry was on its knees with record lows in oil prices. The pandemic then kicked the industry in the face. The timing couldn’t have been worse.
So, what happened to oil prices anyway? Essentially, Saudi Arabia, the world’s top exporter launched a price war over the weekend, primarily targeting Russia, after the OPEC oil cartel and Russia couldn’t reach an agreement on production levels. Russia feels that the US is benefiting by OPEC and Russia reducing their production levels and didn't want to agree to manage production levels. So, Saudi Arabia wanted to punish Russia for not aligning with OPEC.
Since Saudi Arabia has the lowest cost of production in the world (for the major producers anyway), they feel that they are in the best position to handle a decline in prices. They announced price cuts thinking it would bring Russia to the negotiating table. Russia didn’t blink and started talking about how they could outlast the Saudi’s. The market, seeing the world flooded with cheap oil, collapsed (oil industry on its knees). Then the Covid-19 pandemic started to reduce demand. When demand goes down, prices go do, and the industry received its kick in the face.
Now oil prices are at the lowest level since first Gulf War. At this level, much of Canadian oil (especially the oil sands) cost more to produce than the selling price. So, not surprisingly, production is being suspended and the oil industry and all other industries that depend on the oil industry (a high percentage in Alberta) are suffering.
West Texas Intermediate (WTI) Crude Prices
There has been some positive developments for the industry lately as it looks like all parties are ready to talk. But with the significantly reduced demand due to Covid-19 shut downs, prices are likely to stay pretty low for a long time.