Canadian oil industry grappling with dual impact of tariffs and lowest crude prices since 2021
Investors with weighting in the Canadian oil sector will be watching nervously as OPEC’s latest production increase promise looks to further disrupt a market already disrupted by the uncertainty created from US President Donald Trump’s tariff policies.
Crude oil prices already fell to its lowest prices since 2021, from over $71 USD a barrel at the start of April to below $60 USD since the beginning of May.
While uncertainty from tariffs have been a nuisance to Canadian oil producers, Waqar Syed suggests a continuing decrease of WTI oil prices will be much more consequential to the industry.
“They’re certainly not helpful. You have all this oil price impact on one hand, while your tariffs are going to raise input costs. So companies can get squeezed a little bit on the margin side,” said Syed, head of equity research energy services at ATB Capital Markets. “But by and large, I think the biggest issue right now is the oil prices.”
While OPEC predicts it will be able to up its production to 1.2 million barrels per day, Syed says many member countries have already been pumping out more than their quota. He believes that OPEC will revise its production outlooks, which would soften the potential decrease in oil prices, which have been predicted to go as low as $40 USD a barrel. Syed projects that crude oil prices will eventually settle at between $58 to $60 USD a barrel, the current global price.
“You have OPEC there’s a 1.2 million barrels a day of demand growth, which is kind of outlandish. I think they will have to revise that,” he said. “OPEC wants to grow market share rather than reduce right now, they're removing quotas. There is a big imbalance coming. Whenever you have this kind of imbalance, oil prices have to fall.”
Syed explains that midstream Canadian companies that move oil will be less impacted by the global price fluctuations, while Canadian companies will also see less impact than their US counterparts. He also adds that the appreciation of the Canadian dollar through WTI prices would be impacted as well if prices keep fluctuating.
“Those companies are much less impacted by weak commodity prices. They are only impacted if the volumes actually come down,” he said. “But if WTI is below $60 a barrel, the profitability of anyone that is selling oil is going to be impacted. Relative to the US companies, they're a little bit shielded because the realizations of the Canadian oil sector is driven by WTI.”
Natural gas has become increasingly attractive in the Canadian energy sector, a stark contrast to an oil sector that has faced a bumpy start to the year. Syed argues that gas has performed better due to its relative insulation from global volatility, while oil prices are heavily dictated by external factors such as Trump’s tariffs and OPEC shifts in productions.
If oil prices continue to drop, Syed says there will be large shutdowns in US incremental drilling as margins decline. He says prices below $60 USD a barrel usually spell cuts to drilling, which has already occurred in the US market. But if this drop in activity does not balance the global market, Syed warns that crude oil prices could go as low as $40 USD a barrel, though argues this is unlikely.
The latest OPEC announcement is the result of a long-standing feud between Saudi Arabia – the coalition’s de facto leader – and belligerent countries such as Iraq and Kazakhstan that have ignored agreed upon quotas for their oil according to Syed. He says Riyadh is attempting to send a signal of power to these countries that have caused a nuisance to the cartel.
“The Saudis have been very disciplined about not producing above what they promised. But some of the other ones were cheating – Iraq, UAE, Kazakhstan, Russia at some point as well,” he said. “Those that are voluntarily cut off production, they can bring production back. But those eight that have been cheating previously, they've got to compensate for the cheating that they've done before.”
Syed also points to the US-China trade conflict, one which has sparked concerns over an American recession and serious economic struggles in China. Dropping numbers of cargo shipments to US ports from China has given an indication that decreased consumer spending will cause oil prices to drop.
If neither superpower budges in this unprecedented showdown, Syed says OPEC’s plans to expand production will become even less realistic. But the unpredictable nature of the current global economy means that price predictions may be futile according to Syed, who says projections are entirely dependent on whether the Trump administration finds a deal with its Chinese counterparts.
“If you have a recession in the US, you have China slowing down materially as well. If that slows down, that number continues to get revised down,” he said. “If your demand is growing from point five to point seven, your supply outside of OPEC is growing by 1.2 and that means there is no room for OPEC to increase production. In fact, OPEC needs to reduce production to balance the market.”
