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How low will gas go?

Screen Shot 2020-03-24 at 12.28.39 PM“Oil markets are poised to get worse before they get better, ushering in a new era for petroleum,” U.S.-based Citi Bank said in a recent note to its clients. Already, oil is being produced below the cost of production, with prices falling for Western Canadian Select Crude to under (US) $10 (actually hit (US) $7.36) a barrel for the first time.

Simply, the petroleum market got hammered with a one-two blow, where demand has fallen off sharply and supply has increased dramatically. The result is dispenser prices that few of us have seen in recent years.

The COVID-19 concern has Canadians staying at home and working in place. This means less fuel usage for things like commuting and air travel. Less demand drives prices downward. Add to this the recent dust-up between Russia and the Saudis over OPEC production targets, whereby both parties are pumping oil like there is no tomorrow. Russia is selling at a loss as a way to build European market share and the Saudis (and UAE) are battling back with excess production to bring pressure onto Russia in a bid to get them to ratchet back well flows. The upshot is a glut of petroleum products at a time when world demand is at an all-time low.

The Russians have said they have enough reserve capital to keep up this fight well into next year. The Saudis have cash to burn, as well as low production costs, and have said they will keep up pressure till the sides get back to the bargaining table.

Here in Canada Syncrude and Suncor have scaled back maintenance work on upgraders due to COVID-19 and the companies’ inability to obtain workers for the task. The result here is that synthetic crude continues to flow at a time when levels were set to be throttled back. The result is even more capacity in the system.

The outcome is that gasoline prices have fallen and could drop even more. Some analysts predict an additional 10% to 15% decline under canopy as we move into April. A look at prices this week sees Vancouver around the $1.00 mark for a litre of gas. This is a drop from the high of $1.70 we saw last year. British Columbia is around 0.75 cents a litre. Ontario is reporting sales of 0.59 cents and Calgary motorists discovered pumps offering prices of 0.55 cents Tuesday morning. Nova Scotia is selling as low as 0.66 cents.

The bottom line is that Canadians can expect gas prices to decline further over the short term with prices in Ontario possibly coming in around the 0.60 cent mark later next month. Until Russia and OPEC makeup and play nice expect the barrel price to continue to stay low for the foreseeable future.