Source: The Canadian Press

A 22% hair cut in global crude oil prices over the past three weeks could “wreak havoc” amongst smaller producers in the heart of Canada’s oilpatch, an analyst said Tuesday.

Crude prices have rapidly shrivelled from around US$85 per barrel at the beginning of this month to the $68 range, thanks to jitters over Europe’s economic health and ample U.S. oil supplies.

“This is a case of all the moons aligning to give oil a good kick in the shins,” said Robert Cooper, with Acumen Capital Partners, who believes that demand growth from emerging economies should support higher crude prices in the longer term.

In the meantime, though, the wild swings make it hard for bread-and-butter conventional oil producers to plan their spending.

“Their business model is predicated on spending 100 or 150% of cash flow. To extent that their assumptions are thrown out of whack, that could really wreak havoc with the business plan,” Cooper said.

Companies that established their budgets based on a crude price of $80 may have to revisit their plans given the recent volatility.

“Prudence would dictate that companies pare back. You have to. You can’t go careening over the cliff,” Cooper said.

Oilsands projects aren’t nearly as vulnerable to the short-term volatility as their conventional counterparts, since they have a lifespan of several decades.

“A two week blip in the crude price isn’t going to derail planning on that,” said Cooper.

“To the extent that prices are lower for longer, that would likely cause some pullback.”

In the throes of the financial crisis in late 2008 and early 2009, a slew of oilsands projects were shelved when crude prices shrank to US$35 per barrel and credit markets froze. Many of those projects have since been dusted off, thanks to a brightening economic outlook.

Most economists had pegged the 2010 price of crude at anywhere from US$75 to US$95 per barrel, but are waiting to see how the European crisis plays out before revisiting their forecasts, said TD Bank economist Derek Burleton.

“That spread could widen, particularly with the lower end of that range being brought down,” he said.

It’s not clear how prolonged the market uncertainty will be, or how severe, he said.

“Just like equity markets, you do tend to get outsized moves in oil markets. Some of the investor money is quite hot by nature. You get periods where the commodity gets oversold,” Burleton said.

“The problem is we don’t know the bottom of this.”

If crude continues its downward spiral, the economies of oil-producing provinces like Alberta could take a hit, since a lot of their revenue comes from oil and gas royalties.

The effects are already evident on the natural resource-centred Toronto Stock Market, with its energy index losing 2.3% Tuesday afternoon.

Oil supplies appear to be outpacing demand, which could add further downward pressure on crude prices this year, Burleton added.

“I do get concerned that the fundamental story is still quite weak underpinning oil. I wouldn’t be surprised to see, in the very near term, further significant selling pressure.”