Price of oil hits six-year low on higher stockpiles

Three pumpjacks are shown on the Alberta Bakken oil field near Warner, Alta., on Aug. 3, 2014. (Larry MacDougal / THE CANADIAN PRESS)

CALGARY -- Canadian oil sands producers faced tighter margins Wednesday after oil prices hit a six-year low on news of increased stockpiles.

West Texas Intermediate crude, the North American oil benchmark, went as low as US$40.46 a barrel in intraday trading after a U.S. Energy Information Agency report showed a 2.6-million-barrel increase in American oil inventories.

Desjardins Capital Markets said in a research note that the analyst consensus called for a 400,000 barrel drop in inventories.

The EIA also revised downward its price outlook for oil by US$6 a barrel for 2015 and US$8 a barrel for 2016 compared with last month's forecast. The agency now sees an average of US$49 a barrel for 2015 and US$54 a barrel in 2016.

In a research note Wednesday, Citigroup said that with oil balances pointing to further oversupply this year, a drop to the 2008 low of US$32.40 a barrel is a "conceivable reality."

"There's a lot of worry right now about the overproduction and storage concerns as we come off of summer driving season," said Martin Pelletier, portfolio manager at TriVest Wealth Counsel Ltd.

The drop in oil prices comes as Canadian producers struggle with a high discount to the U.S. benchmark after a major shutdown at a refinery that processes Canadian heavy oil, as well as pipeline disruptions.

"As a result, the Canadian oil producers have just been hammered over the last couple of weeks," said Pelletier.

A report Monday by JBC Energy said oilsands viability is "on the edge" in current markets, with producers on average seeing profits of no more than US$5 a barrel.

Sonny Mottahed, chief executive of Black Spruce Merchant Capital, said Wednesday's low oil price combined with the discount means many producers could be in a negative cash cost position.

"I think you have a serious cash flow crunch that's going to be realized by producers across the board," said Mottahed.

But he said oilsands production has become dominated by majors that are better suited to waiting out price fluctuations.

"The oilsands is a big boys game and the big boys can endure a lot of pain, and they're probably enduring some of that pain right now. And there's probably more pain in sight."

Despite the tight financials, Canadian oilsands producers have little choice but to keep producing, said Peter Argiris, an analyst at Wood Mackenzie in Calgary.

"The problem is, these companies just can't stop producing. . . . They need to pay their bills, they need to ensure their bond covenants are not breached. So there's a variety of reasons why companies need to produce."

But some companies have started to cut their highest-cost production, with Canadian Natural Resources Ltd. shutting-in 4,000 barrels a day of production "primarily in northern Alberta" because of the unfavourable economic conditions.