Canadian producers advised to spend nothing on drilling as WTI oil price hovers at $25

World oil prices have fallen so low that producers in Canada are being advised not to spend any money on drilling and, in some cases, to stop producing crude oil from existing wells.

Benchmark U.S. crude oil prices rebounded dramatically on Thursday to $25.91 US per barrel, a gain of $5.08 from near-20-year-lows on Wednesday, but analysts fear the gains may not last long in an environment of market volatility.

At $25 US per barrel, conserving cash is the only way producers can ensure survival, according to a report titled A World Without Rigs from Tudor, Pickering, Holt and Co.

"If you believe prices are staying this low forever then we really don't have an industry, but I think all of us believe there will be a recovery at some point in time," said report author Jordan McNiven, a Calgary-based analyst, in an interview.

"It's about hunkering down and making sure you're around to see the other side ... the most defensive approach you can take is to do nothing."

He said an analysis of the financial strength of Canadian producers his firm covers shows all can survive even if prices remain as low as $25 US through 2021 — provided they stop most spending.

It's unlikely the low price environment will last that long but it could easily last more than six months, he warned.

The list of companies cutting 2020 capital spending plans grew longer Thursday with Paramount Resources Ltd. reducing its budget range to between $185 million and $250 million, compared with earlier guidance for between $350 million and $450 million.

WCS below $10 a barrel

Fellow Calgary-based producer Tamarack Valley Energy Ltd., meanwhile, slashed its 2020 budget to about $100 million from $175 million.

West Texas Intermediate crude prices tumbled to $20.83 US per barrel on Wednesday, their lowest level since at least 2003.

Bitumen-blend Western Canadian Select (WCS) crude, which trades in lockstep with WTI, closed at $9.12 US per barrel, a level that translates to less than half as much for the bitumen after subtracting the costs of buying light petroleum blend.

Global oil prices are being hit by fears that demand will fall due to the COVID-19 outbreak, at the same time that the market is flooded with barrels of cheap oil after Russia and Saudi Arabia failed to set new production limits.

"With crude oil demand slowing and Russian and Saudi production ramping up, we are in an oversupply situation, and have seen third party estimates ranging from two million barrels per day to potentially about nine million barrels per day delta, with no clarity on when either of the two new phenomena might revert to prior levels," said Stifel FirstEnergy in a research report.

"While we clearly think that recent WTI prices are unsustainably low over the medium term, we have no particularly poignant insights as to whether the current status persists for weeks, months, quarters, or extends beyond a year."

'It really is a price war'

Consultancy Wood Mackenzie expects no production growth in Canada in 2020 compared with last year, said senior analyst April Read, adding it's impossible to say how long low prices will persist.

"There are only a few levers companies can pull to handle these prices and reducing capex is one of them. It's good to see companies being very decisive," she said in an interview.

"It really is a price war between Russia and Saudi. In Canada we're more of a price taker than a price setter for oil and gas."

McNiven said he expects to see more producers to follow the example of Baytex Energy Corp. in shutting down production from wells that are less productive or more expensive to maintain.

On Wednesday, Baytex announced it would stop producing about 3,500 bpd of low- or negative-margin heavy oil production, adding it will be able to quickly turn off more wells or restart shut-in ones if conditions change.

It reduced its production forecast by 8,000 barrels of oil equivalent per day to between 85,000 and 89,000 boe/d.

In a report Thursday, AltaCorp Capital noted that capital spending has been cut by an average of about 30 per cent compared with last year for 29 American and 17 Canadian producers who have announced reduced capital budgets so far.

"We note that revised 2020 budgets were mostly set when WTI was in the $30 to $35 US per barrel range and, given the continued declines in global crude prices over recent weeks, we believe further cuts could occur," it said.

It said Canadian producers have collectively cut roughly $4.5 billion in capital spending since March 9.