This article was published by the Canada Energy Regulator on June 24, 2020.
To slow the spread of the COVID-19, countries around the world have imposed travel restrictions and stay-at-home orders. This has significantly reduced demand for crude oil products like gasoline, diesel, and jet fuel.
Meanwhile, in March 2020, Russia and Saudi Arabia increased their crude oil production after OPEC and Russia failed to extend a production agreement in place since late 2016. Much lower demand combined with higher supply caused global oil prices to plunge from early January 2020 to the end of April 2020.
Over this period, the price for West Texas Intermediate light oil at Cushing, Oklahoma fell by over 80 per cent. Western Canadian producers reacted by reducing oil supply(1), cutting an estimated 972 000 b/d by mid-May when compared to a pre-March baseline.
When oil prices fall below what it costs to operate a well or oil sands project, producers can limit their losses by shutting in their oil production. In March 2020 in western Canada, producers began to shut oil wells, reduce or stop steaming at some in-situ oil sands projects, and shut down some oil sands mines.(2) Producers can also limit losses by reducing the number of new, money-losing wells they plan to drill.
Cuts to oil supply can be implied from reductions to export pipeline flows, rail-car loadings, and refinery demand. Also important are weekly changes to storage inventories. Storage injections (positive values on the chart) show when supply exceeded demand in the market. This suggests that, in April 2020, supply cuts alone were not enough to balance supply and demand. Meanwhile, storage withdrawals in May and June 2020 (negative values on the chart) show the market needed more oil than was otherwise available.
Oil prices have regained some of their losses since late April, in part because oil-producing countries around the world—including Russia, the countries of OPEC, and the United States—have also lowered their production. While prices are still much lower than the start of the year, western Canadian companies have restarted some production, increasing supply by an estimated 259 000 b/d since mid-May.
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