Canada’s oil and gas industry stares at worst-ever recession

Canada’s oil and gas industry is still reeling from the double whammy of demand destruction from the coronavirus and the overwhelming supply from warring producers such as Saudi Arabia and Russia. With storage likely to brim by mid-May, the outlook for global crude prices is still grim, though WTIC futures, currently trading at $21.24 a barrel, are showing signs of recovery as production cuts take effect. Still, they are down a massive 70% over the last one year.

Canadian GDP plunges

The oil industry plays an outsized role in the Canadian economy, accounting for 5.6% of the country’s GDP. With recessionary conditions already triggered by the coronavirus pandemic, the Canadian economy could do without the oil shock. In March, Canada’s GDP plunged by a record 9% compared to February, according to data from Statistics Canada.

Canada’s employment rate fell to 58.5% in March, the lowest number seen since April 1997. Over a million people lost their jobs during the month.

The twin hits from the virus and the oil price decline could produce worse numbers for April.

The strong correlation between the performance of the Canadian economy and the oil price has ominous implications for the Canadian economy.

"Anything to do with energy right now is a challenge until we get some clarity (on a recovery)," says Duncan Mathieson, Toronto-based executive vice president and head of Canadian equities at Addenda Capital Inc. "There are a lot of domino effects that happen with things like this."

Canada’s largest airline, Air Canada, said it lost $1.05 billion Canadian (US$748 million) in its first quarter, compared with a profit of $345 million in the same quarter last year, amidst global travel restrictions due to the pandemic.

“We’re now living through the darkest period ever in the history of commercial aviation, significantly worse than 9/11, SARS and the 2008 financial crisis,” CEO Calin Rovinescu said on a conference call.

The airline industry is a major oil industry customer for aviation fuel.

Oil industry in a perfect storm

A liquidity crunch, difficulties in accessing finance, plunging equity prices, and widening credit spreads are exacerbating the conditions in the industry.

Alberta, the bedrock of the Canadian oil industry, has been a net fiscal contributor to Canada in 43 of the past 50 years. The recent developments in oil cast a shadow on the economic future of the province, and therefore, that of Canada.

“There’s no way to sugar-coat it: the recession brought on by COVID-19 and the oil glut will be the worst downturn in Alberta since the 1930s,” says Todd Hirsch, Vice President and Chief Economist, ATB Financial.

Production cuts are inevitable, and by some estimates, the Canadian oil industry production could be down by at least a million barrels a day in the immediate future.

According to the Petroleum Services Association of Canada (PSAC), well drilling in Canada could drop by 37% in 2020 compared to 2019.

Downgrades of energy company bonds may be around the corner, and many of the smaller Canadian oil companies would not be able to survive these conditions.