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Abu Dhabi, UAESunday 16 December 2018

Canadian oil producers hurt by double whammy

Localised glut sent heavy Western Canadian Select (WCS) crude plunging to a $50 discount to West Texas Intermediate futures

Crude oil tanks at Kinder Morgan's North 40 terminal in Sherwood Park, Alberta, Canada. Canadian oil producers are suffering. Reuters
Crude oil tanks at Kinder Morgan's North 40 terminal in Sherwood Park, Alberta, Canada. Canadian oil producers are suffering. Reuters

Canada’s oil producers can’t catch a break.

Even as local production cuts help alleviate pipeline bottlenecks, heavy crude plunged below $18 a barrel for the first time since 2016 - dragged down by global oil prices.

“The differentials are holding to modestly improving but the global prices are sliding,” said Kevin Birn, a director on the North American crude oil markets team at IHS Markit. “We called it a double whammy.”

Oil sands producers including Canadian Natural Resource, Devon Energy, Cenovus Energy and Athabasca Oil have announced curtailments that may total 140,000 barrels a day or more, after a localised glut sent heavy Western Canadian Select (WCS) crude plunging to a $50 discount to West Texas Intermediate futures, the widest in Bloomberg data going back a decade.

Since then, WCS’s discount has narrowed to about $42 a barrel, but the absolute price has plunged along with world crude benchmarks amid concerns of oversupply. The US has granted eight nations waivers to continue buying Iranian oil, while Opec and Russia have boosted production. WTI futures dropped for a tenth straight day on Friday, falling briefly below $60 a barrel.

“Lower global oil demand growth estimates and soaring US production have all fed into this bearish crude picture,” Joan Pinto, an energy specialist at Canadian Imperial Bank of Commerce, said in a note. “The WCS differential has actually held in remarkably well, all things considered.”

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Adding to the Canadian oil woes, two pipeline projects that would eventually help producers get their crude to markets are facing court delays. At the weekend, a US court ruled that an environmental assessment of TransCanada’s Keystone XL pipeline was inadequate, a decision that could delay the $8 billion project by eight months. Earlier this year, a Canadian court ruled that the planned expansion of the Trans Mountain pipeline to the Pacific would need to undergo further regulatory reviews.

Canada’s crude export pipelines are rationing space after a surge of new production from the oil sands came online late last year and early this year. Recent refinery maintenance in the US Midwest has also reduced demand for Canada’s oil. Currently, just one export pipeline project, Enbridge’s Line 3 expansion, is under construction and scheduled to begin operating by the second half of next year.

Oil companies may be curtailing production now in anticipation that they will get better prices later when access to rail cars or pipelines improves, Mr Birn said.

“There is a financial upside to their strategy,” he said.