Dina Cover of TD Securities noted that the rally in the price of crude oil to a high of $54 a barrel last week was based on increased optimism of a global economic recovery and data suggesting that fuel consumption rose during the previous week.
“However, crude oil fundamentals do not support a price in the mid-$50s, and this morning, prices have fallen back below $51 per barrel as renewed economic concerns filtered into the market,” she said in a note.
Patricia Mohr, an economist at Bank of Nova Scotia, remains more upbeat. She[amp]nbsp;argued that recent production cuts implemented by the Organization of Petroleum Exporting Countries have taken out 3.3 million barrels a day – and additional pledges for production cuts could bring that total to 4.2 million barrels a day. That is far greater than the 2.4 million barrels a day decline in year-over-year oil consumption in 2009, suggesting that supply is not out of whack with demand.
“While oil demand could retreat further in the second quarter of 2009, OPEC's cuts will go a long way towards rebalancing world markets, particularly if world demand levels out in the second half of 2009,” she said in a note, adding that non-OPEC supplies are declining. She believes that oil prices will rally to $65 a barrel in 2010 and over $75 in the medium term.[amp]nbsp;
Ottawa, Toronto — The federal and Ontario governments have committed to provide $4-billion in short-term loans to General Motors of Canada Ltd. and Chrysler LLC, but the two companies must negotiate deeper savings from their workers and suppliers before the governments agree to a long-term restructuring plan.
The governments are forcing General Motors to negotiate further reductions in retiree pension and benefit costs with its Canadian Auto Workers union, just weeks after the company and union agreed to a deal that GM said would make it competitive with foreign-owned car makers in North America.
On Monday afternoon, CAW chief Ken Lewenza said the union will not reopen talks with GM Canada.
“We have determined that further fundamental changes for both companies are needed,” Federal Industry Minister Tony Clement said in Ottawa on Monday.
Chrysler must achieve deep cost reductions in its now-stalled negotiations with the CAW and also conclude a strategic alliance with Italian auto maker Fiat SpA.
Following the lead of the U.S. administration, Ottawa has given General Motors two months to conclude its viability plan, and will lend it $3-billion until then.
Chrysler has one month to conclude its work, and can borrow $1-billion; the company was expected to draw down $250-million of that amount Monday.
The companies eventually hope to borrow $11.5-billion from the Canadian governments to finance their long-term restructuring plans.
Ottawa is also demanding that the companies restrict the compensation of their top Canadian executives, including no performance bonuses for 2008, no raises in 2009 and no “golden parachutes” for executives who leave the firms.
Mr. Clement and Finance Minister Jim Flaherty, along with Ontario Economic Development Minister Michael Bryant, announced the decision at a news conference in Ottawa Monday.
In a television interview Sunday, Prime Minister Stephen Harper said his government had “no choice” but to provide some assistance to see whether it could rescue the struggling car companies.
“If we're going to put taxpayer money in this, we have to make sure it works,” Mr. Harper told Fox News. “And I think, given the scope and the size of this industry, we have no choice.”
General Motors – which employs 15,000 people in Canada – has asked the federal and Ontario government to provide up to $7.5-billion in long-term funding to maintain its 20-per-cent share of North American production in Canada.
Chrysler – with 9,400 workers in Canada – has asked for $4-billion to maintain a 25-per-cent share of production here.
Mr. Clement has stressed the aid would not only save direct production jobs but protect the vast web of domestic suppliers that feed the Canadian plants.
The two Detroit companies reached this point because of “a failure of leadership from Washington to Detroit,” President Barack Obama said Monday in outlining the U.S. government's response.
“These companies and this industry must ultimately stand on their own and not as wards of the state,” Mr. Obama said.
The President raised the possibility that one or both Chrysler and GM may have to go into bankruptcy protection to win the concessions needed from stakeholders.
In fact, “given the magnitude of the concessions needed, the most effective way for Chrysler to emerge from this restructuring with a fresh start may be by using an expedited bankruptcy process as a tool to extinguish liabilities,” the U.S. government said in a document outlining ways that the two companies might repair themselves.
After consultations with U.S. officials, the Canadian governments determined GM was not viable under the restructuring plan it submitted in February, and needed to make a more realistic assessment of future car sales and its share of the market, and find deeper cost savings from workers, management, dealers and suppliers.
Chrysler is seen as not viable as a stand-alone company and needs to conclude a strategic alliance with Fiat to qualify for further taxpayer assistance.
Ottawa insists that, while the short-term loans are not “risk-free,” they are well secured by the Canadian assets of both companies. As well, the Canadian governments will receive warrants that can be converted to GM shares, and additional guarantees from Detroit-based, privately owned Chrysler.
Chrysler, which is battling the Canada Revenue Agency over $1-billion in back taxes, cannot use the loan proceeds to pay back taxes.
Chrysler president Tom LaSorda told a parliamentary committee that, in order to close its alliance with Fiat, the company needs a letter from Canada Revenue that the government will not seek more security on the tax liability. Government officials won't say whether Canada Revenue has agreed to provide that letter.
The U.S. government wants Chrysler to wring more concessions out of the United Auto Workers at its U.S. operations, a demand that is likely to further complicate the stalled talks between the auto maker and its Canadian workers.
“Chrysler, Fiat and the UAW need to reach an agreement that entails greater concessions than those outlined in the existing loan agreements,” the U.S. government's task force on the auto industry said in its analysis of the Chrysler viability plan released early Monday.
Chrysler and the CAW are at loggerheads over a cut of $19 in the auto maker's $76 hourly labour costs in Canada. The company insists it needs concessions that will generate a savings of that amount, while the CAW has countered that it will not provide more concessions to Chrysler than it gave to GM Canada in an earlier agreement.
Talks between the union and Chrysler were put on hold over the weekend while the two sides awaited the U.S. administration's verdict on whether Chrysler is viable.
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