The S&P/TSX composite index closed well off the worst levels of the session, falling 119.91 points to 14,265.01 with the energy sector down 4.6 per cent.
The February crude contract in New York dropped $2.29 to US$46.07 a barrel — its lowest level since April 2009 — after energy analysts at Goldman Sachs reduced forecasts for global benchmark crude prices, predicting inventories will increase over the first half of this year. It forecast that West Texas Intermediate — the North American benchmark —will trade at US$41 a barrel in three months. It had previously forecast WTI at $70.
Oil prices have collapsed since June 2014, falling more than 55 per cent. They have dropped more than 33 per cent just since the end of November, when Saudi Arabia made it clear it would not cut production to support prices.
"The speed has been breathtaking," said David Wolf, portfolio manager, co-manager of Fidelity Canadian Asset Allocation Fund.
"And I think one of the reasons that equity markets are struggling with this is because it is a bit reminiscent of what happened in late 2008, so the surrounding memories of that are an economy in free fall, a real demand shock and at that stage the oil prices decline was really telling us something very bad."
But Wolf said it is important to remember that this price shock is rooted in a glut of global oversupply and "markets are underestimating how much of a positive this is going to be to company earnings or economic growth."
Meanwhile, another major energy player is responding to the collapse in oil prices with lower capital spending plans. Canadian Natural Resources Ltd. (TSX:CNQ) is reducing its 2015 capital spending plan by nearly 30 per cent and now plans to spend $6.19 billion in 2015, or $2.4 billion less than expected in November. Canadian Natural dropped $1.36 to $31.81.
The Canadian dollar declined to levels not seen since April 2009 as tumbling oil sent the loonie down 0.71 of a cent to 83.56 cents US.
New York indexes were also negative as the Dow Jones industrials fell 96.53 points to 17,640.84, the Nasdaq dropped 39.36 points to 4,664.71 and the S&P 500 index lost 16.55 points to 2,028.26.
Elsewhere on the TSX, the base metals group was down 3.9 per cent as lower demand prospects sent copper to a five-year low with the March contract down cents lower at US$2.73 a pound.
Other market weights included financials, down one per cent while industrials shed 0.7 per cent.
In the positive column, the gold sector was ahead five per cent as February bullion gained $16.70 to US$1,232.80 an ounce and telcos gained 0.45 per cent.
On the corporate front, Guelph, Ont.-based Linamar Corp. (TSX:LNR) plans to create 1,200 jobs as the company launches a $500-million expansion, financed in part by the Ontario and federal governments. Linamar shares gained 20 cents to $69.
Shares in Tekmira Pharmacheuticals (TSX:TKM) jumped $10.55 or 56 per cent to $29.38 after the Vancouver-based company announced a friendly merger proposal with OnCore Biopharma Inc., a U.S. drug developer working on complementary products for treating Hepatitis B.