Following the OPEC announcement last year that the organization would not be lowering production in response to declining prices, it was widely expected that North American producers would be the first to scale back production once they felt the squeeze. It now appears that we are seeing the first cracks in that edifice.
As the oil price has nosedived by more than 50% since last summer, and the new low price environment becomes more of a long-term reality than most expected, energy companies are scrambling to cut costs and sell off assets. Thousands of workers have lost their jobs and billions in capital expenditures have been slashed. (Source: Globe and Mail, last accessed September 9, 2015.)
But it appears that Canadian oil producers are doing what actually needs to be done: shut off production.
The current crisis stems from a fundamental oversupply in global crude oil production, and only a decrease in that supply can bring uplift to slumping oil prices.
More than 8,000 barrels per day of production has been idled by companies such as Canadian Natural Resources Limited (NYSE:CNQ), and Baytex Energy Corp. (NYSE:BTE) this year alone, and there’s more to come. (Source: BNN, last accessed September 9, 2015.)
Though this is a pittance when you consider that global markets are currently oversupplied by at least two million barrels per day according to EIA data, prolonged market conditions threaten to spread this trend to larger players. (Source: EIA, last accessed September 9, 2015.)
Firms such as Devon Energy Corporation (NYSE:DVN) and Husky Energy Inc. (OTCMKTS:HUSKF) reportedly might also begin throttling back the pumps, and they represent 11% of Canada’s production of 3.7 million barrels per day. (Source: Financial Post, last accessed September 9, 2015.)
This will likely have a cascade effect, and will spread to small and medium-sized producers in the U.S., but also in the North Sea.
Larger companies, however, with their massive up-front costs and extensive sunk capital, generally have no choice but to keep producing even when their finances are in the red. This is because continuing to produce is cheaper than shutting down production.