'Agonizing': The prospect of a historic oil glut weighs on crude prices

The North American price for a barrel of oil dropped below$30 US on Monday as the prospect of a historic glut of crude weighed heavily on energy markets.

"At these prices, I think most operators would find this agonizing, or eye-wateringly painful,"said IanNieboer, managing director of RS Energy Group.

On Monday, the price of West Texas Intermediate (WTI), the North American benchmark, dropped to $28.70 US per barrel, down $3.03.

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A number of Canadian players also saw their stock price take a hit, includingCanadian Natural Resources, which was down $5.41, or 27 per cent, to $14.44 per share.

Falling oil prices will add to the financial strain on many Canadianoil producers and governments that had built their fiscalplans aroundmuch higher prices.

Prices have been dealt a double blow: concern about the economic impact of the novel coronavirusand an oil price war involving Russia and Saudi Arabia.

Crudeprices sank Monday as oil markets again weighed the impact of growing crude supplies at a time when demand is pulling back.Steps by governments to limit travel, for example, areexpected to have a significant effect.

Since the start of the price war between Saudi Arabia and Russia earlier this month, the WTI price has fallen 23 per cent, while Brent Crude, the global benchmark price,has declined 25 per cent.

The world is looking at the"possible buildup of the most extreme global oil supply surplusever recorded," IHS Markit said in a report on Monday.

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It estimates the surplus could range from 800 million to 1.3 billion barrelsin the first six months of 2020 if the price war continues amidsta global recession and coronaviruspandemic.

That would exceed the six-month global supply surplus of 2015-16,which was a cumulative 360 million barrels.

"Extraordinary conditions can lead to startling outcomes," IHS Markit said.

"That is where the oil market now finds itself: in a truly extraordinary situation in what has been a transformative week for the global industry."

In recent days, the situation has spurred a number of Canadianproducers to cut their spending plans for 2020, including Calgary-based Husky Energy, Cenovus Energy and MEG Energy.

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Analysts expect to hear about more cuts in capital spending and production in the Canadian oilpatchdue to low prices.

Oilfield services analyst Tim Monachello of AltaCorp Capital is forecasting a 31 per cent decline in the average working rig count in Canada for the rest of 2020 even if the U.S. oil price rebounds to an average of $41.50 US per barrel.

Alberta Premier Jason Kenneyhas said he expects oil companies to make layoff announcements in the next couple of weeks.

American shale oil producers are also being punished by the low crude prices, with a number of those companies announcing they will be cutting drilling activity this year.

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Nieboer of RS Energy Group, now part of Enverus, pointed to a couple of factors that likely contributed to falling crude prices on Monday.

He said state-backed Saudi Aramco, which released its latest financial results, sounded committed to its plans to raise oil production. Also, the "extraordinary" decision by the U.S. Federal Reserve to slash interest rates to zero per cent may have rattled the broader market,Nieboer said.

"That certainly has shaken, I think, a lot of people's confidence about how quickly we might recover from [novel coronavirus] and the depth of impact that's having on the real economy," he said.

"The combination of those two things, plus probably 50 other little pieces of information, makes today a difficult day in the markets broadly, and certainly for oil markets, a tough one as well."