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Against the backdrop of plunging US and Canadian oil prices, the North American export credit agencies (ECAs) are readying support for the struggling sector.

After oil prices dropped into negative territory for the first time in history, Export Development Canada (EDC) has announced it will boost financing capacity to help Canada’s energy sector “navigate these uncertain times”.

This includes funding for exploration companies and producers, businesses responsible for midstream activities such as processing, storage and transportation, as well as small and medium-sized oilfield companies that provide various goods and services.

While a spokesperson for EDC was unable to confirm the exact dollar amount it will provide in additional financing, it says the support will be provided through its lending, bonding and accounts receivable insurance products.

Meanwhile, the Export-Import Bank of the United States’ (US Exim’s) chief banking officer Stephen Renna tells GTR that it is talking to a “number” of companies in the oil and gas industry.

But he says: “During this economic lockout period, it’s hard for us to be a lot of assistance,” adding, “in order for US Exim to function we need a willing buyer and seller – we need transactions”.

Renna adds: “What we have in the oil sector right now is absolutely no transactions happening. In fact, companies are just piling up crude oil wherever they can find a place to store it because there’s no demand for it.”

Speaking about how US Exim could help oil companies going forward, he says: “As the economy is re-engaging, there’s going to be a certain lag period before private sector banks are fully re-engaged, and there’s going to be a larger credit risk out there. So we’ll be able to step into that breach on behalf of US exporters.”

Energy companies will be able to get funding through the bank’s working capital loan guarantees and export credit insurance programmes, Renna notes.

The global oil sector has been hard hit by a total drop-off in demand in the past couple of months, following the imposing of travel restrictions and stay-at-home orders by governments the world over in response to the coronavirus.

Meanwhile a price war between Russia and Saudi Arabia only served to compound the situation further in March.

The pair managed to reach a truce earlier this month, with the Organization of the Petroleum Exporting Countries, Russia and other oil producing nations agreeing to slash global production by around 10% in May – but there are concerns that these measures have not gone far enough.

With the International Energy Agency (IEA) predicting that global oil demand in April will be down by as much as 29% in the wake of Covid-19, IEA’s executive director Fatih Birol told Bloomberg this week that Opec may consider deeper cuts in the future.

 

Plummeting North American oil prices

Monday saw the US oil price benchmark go into negative numbers for the first time ever, with prices on futures contracts for West Texas Intermediate (WTI) reaching as low as -US$40.32 a barrel.

This spells trouble for Canada’s oil benchmark, explains Stewart Glickman, an energy equity analyst at investment research firm Centre for Financial Research and Analysis (CFRA).

“Because the West Canadian Select (WCS) normally trades at about somewhere between a US$15 and US$20 discount to WTI, when the WTI is under pressure like it is, Canadian oil is essentially free, or worse. I think that the recovery path will be faster for the US and slower for Canada,” he tells GTR.

Such a sudden and drastic plunge in WTI prices was caused, in part, by a quirk in the way the oil futures market operates – as well as a lack of storage capacity.

With futures contracts, two parties agree to buy or sell a particular asset for a set price at a future date.

These parties could be oil producers or airlines, for instance, which have high levels of commercial exposure to any fluctuations in the price of oil.

They might try and hedge their risk by buying and selling futures, with oil producers able to use the market to lock in prices for their future output.

Market participants which often have no interest in the physical trading of oil are active in the futures markets, also, with banks, hedge funds, commodity trading advisors, and other money managers all seeking to turn a profit from changes in prices.

Inevitably, futures contracts for the coming month expire, and when this happens these contracts need to be settled with a real-world transfer of oil.

With the May WTI futures contracts set to expire on Tuesday, traders were facing the imminent prospect of having to take physical delivery of the cargo at the country’s main delivery point in Cushing, Oklahoma, next month.

These monthly deadlines generally go by without much drama or fanfare. However, Teodora Cowie, senior analyst at energy consultancy firm Rystad Energy, tells GTR that this week was different.

She says: “With 108 million barrels-worth of contract positions still not closed by the traders in the market, the buyers were rushing for the door to avoid taking physical delivery of crude at Cushing in May – because ‘where am I going to store that oil’ when remaining available storage capacity is believed to run out during the next few weeks.”

According to Glickman, the negative May futures prices are not “representative of the market at large”.

He says the dramatic plunge in May futures on Monday was more a case of market speculators – who lacked the ability to take physical custody of the cargo – being caught out.

He adds: “I think, a better reflection of where the market for oil stands is the June contract, which, as of Monday [March 20] was still US$20 a barrel, but it too is coming under pressure. And what that should tell you is that people are very worried that we’re running out of places to store the oil.”

 

Dwindling storage

According to Cowie, storage capacity is almost “to the brim” in the US, meanwhile Canada is “days away from running out of available storage capacity”.

Diminishing storage space and meagre oil prices has led to some global producers shutting down production, which in turn has led to fears that the North American oil sector could be rocked by insolvencies and job losses in the coming months.

Speaking about the US market, Cowie says she expects a jump in Chapter 11 filings – a type of bankruptcy proceeding in the US wherein companies work to reorganise their debts – this year “as the state of the WTI oil prices renders cash flows from operations unable to service their debts”.

She adds: “While the most robust players can handle prices below US$20 per barrel, the industry needs to see prices at US$40 to US$45 per barrel to prevent a surge in Chapter 11 filings.”

Across the border, Thomas Liles, also a senior analyst at Rystad Energy, tells GTR that bigger oil companies such as Suncor and Canadian Natural Resources will “probably come out of this ok”.

Nevertheless, he says that “there will be bankruptcies for sure”, and that smaller players will be “very challenged”.