Oil producers brace for more cost-cutting ‘pain’ as prices threaten to fall below $40 – by Yadullah Hussain (National Post – August 20, 2015)

The National Post is Canada’s second largest national paper.

Oil’s price plunge to $40 prices this week will force producers to contemplate more cost-cutting measures at a time of great austerity.

The decline continued Thursday with futures sliding as much as 1.4 per cent in New York, trading near US$40 a barrel, after losing 4.3 per cent on Wednesday.

West Texas Intermediate for September delivery, which expires Thursday, declined as much as 59 cents to $40.21 a barrel on the New York Mercantile Exchange, and traded at $40.30 at 11:30 a.m. London time. The contract slid $1.82 to $40.80 on Wednesday, the lowest close since March 2009. The more-active October futures lost 59 cents to $40.68.

The plunge began Wednesday after the U.S. Department of Energy slashed US$6 off its average oil price estimate this year to US$49 per barrel, citing increases in global oil inventories.

“We get down to US$40 level, companies will have a hard time just to sustain their businesses,” Kyle Preston, analyst at National Bank Financial Inc. said in an interview. “Reality is, if we stay here at US$40 or below US$40, we are going to see more cuts across the board.”

Adding to the negative sentiment, Citibank analysts said oil retracing its 2008-low of US$32 per barrel was a “conceivable reality,” especially if capital markets reduce their support of U.S. shale producers.

Canadian oilsands, which have average operating costs of US$35-U$40 per barrel, are already suffering as the heavy oil benchmark Western Canadian Select is trading around US$25 per barrel thanks to temporary logistical bottlenecks.

“Canadian heavy producers are already feeling the pain of $30 prices,” said Carmen Velasquez, executive director of energy programs at the University of Alberta.

However, a 13 per cent year-to-date decline of the Canadian loonie against the American dollar and strong balance sheets of some players mean production shut-ins are not being contemplated, Citibank analyst Christopher Main wrote in a note Wednesday.

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