Since Alberta Premier Rachel Notley announced an oil production cut of 325,000 bpd beginning next month, the spot price for Western Canadian Select has gained over 85%…
Additionally, OilPrice.com’s Irina Slav writes that the deep discount, at certain times more than US$40 a barrel, had closed by more than half over the last eight days since the cut was announced.
The discount could narrow even further as the cut enters into effect in January and producers and refiners negotiate future deliveries. This will in turn benefit Canadian producers who have already begun revising capital expenditure plans for 2019 pressured by the low price of their oil.
Last week, Premier Rachel Notley announced that the government of the province will enact an 8.7-percent crude oil production cut to clear excess stockpiles as pipeline bottlenecks and growing volumes of oil being transported by the costlier railway pressured Western Canadian Select to historic lows against the U.S. benchmark, WTI.
Premier Notley last week described the situation as “fiscal and economic insanity.” Alberta now has to buy more oil trains—a more dangerous way to transport oil than pipelines—because production is rising inexorably while pipeline capacity remains the same in the face of fierce opposition from environmentalist groups and First Nations against new pipeline projects. The National Energy Board recently said crude oil production in Canada this year will average 4.59 million bpd, up by 22,000 bpd from earlier forecasts.
However, plans for 2019 are for reduced spending, Bloomberg notes, as producers feel the bite of low oil prices deeper. The decision to start cutting production would save not just spending, but also jobs because many companies had planned substantial layoffs and reduced spending to a minimum to stay afloat. The lower spending could mean lower production growth, too, which would serve to keep prices higher.
And while some celebrate:
“It’s working — the proof is in the price,” said Tim Pickering, chief investment officer of Auspice Capital Advisors Ltd. in Calgary. “The amount of the curtailment was enough to make a measurable difference in the glut that we have.”
There is a problem for Canadian suppliers, as Bloomberg reports, Western Canada Select crude has surged from ‘too cheap to be profitable’ to ‘too expensive to sell’…
Alberta’s heavy oil trades at about $41 a barrel, about $9 less than on the U.S. Gulf Coast, according to traders and data compiled by Bloomberg. For a shipper without committed volumes, that price difference is so small that it wouldn’t cover the costs of shipping it down either TransCanada Corp.’s Keystone pipeline to Houston or Enbridge Inc.’s pipeline system. Gulf Coast imported about 500,000 barrels a day of Canadian crude in September.
As Bloomberg details, for companies without commitments to ship regular volumes, a barrel of crude sent down the Keystone system from Hardisty, Alberta, to Houston will cost more than $15.50 a barrel starting Jan. 1, according to the tariff filed with the U.S. Federal Energy Regulatory Commission and Canada’s National Energy Board. The cost to ship uncommitted volumes to Texas from Hardisty down Flanagan South via the Enbridge mainline is about $9.40 a barrel including a separate power charge, according to a filing with the National Energy Board.
“Everyone is bidding up those barrels to make sure they can cover their pipe space,” Mike Walls, a Genscape analyst, said by phone. “People are really just hyper-focused on January and that’s why you are seeing these dramatic price moves.”
The hope is that as long as the pipes are full, the price difference between Canadian heavy crude and West Texas Intermediate futures will necessarily widen enough to cover the costs of shipping the crude by rail to the Gulf, which is between $18 and $22 a barrel, Walls said. Alberta’s government has tried to stimulate crude-by rail shipments by announcing plans to purchase rail tanker cars.
Just another example of government intervention’s unintended consequences.