Canadian oil prices primed to see 'further improvement'

Daniel Fowler
December 6, 2018

Western Canadian Select, or WCS, has been trading at a discount of more than $40 a barrel to the US oil price benchmark, WTI, because the country is now producing 190,000 barrels per day (BPD) more oil than its pipeline system can handle.

The steep discount has stripped billions of dollars from the Canadian economy by some estimates, and at one point Canadian oil was selling for more than $50 less than US oil traded on futures markets.

Under current conditions, Alberta is producing 190,000 barrels of crude oil and bitumen per day over what can be now shipped out using pipeline, rail and other means.

Saskatchewan Premier Scott Moe said in a statement that the province isn't considering following Alberta's example.

Winners and losers: Calgary economist Trevor Tombe says $4 per barrel doesn't sound like much but, over a year, it's worth about $1 billion to the Alberta government's budget. Saskatchewan has no oil sands production and about 60 per cent of the oil produced in Saskatchewan is light and medium oil.

Rory Johnston, analyst at Scotiabank in Toronto, said the cuts could narrow the discount for WCS to around US$20 in the first quarter of 2019, down from an earlier estimate of around US$29.

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Alberta's price cut is rare but not unprecedented - in 1980, Tory premier Peter Lougheed forced oil production cuts to protest then-prime minister Pierre Trudeau and his Liberal government's national energy program.

"As proposed, the meeting agenda does not include any discussion on the crisis facing the energy industry and the price differential that is crippling the Alberta, Saskatchewan and Canadian economies. Saskatchewan will continue to work with our provincial counterparts and advocate for the federal government to create a long-term solution to this crisis by getting pipelines built so we can sell our oil for what it is worth", Moe said.

Energy Minister Marg McCuaig-Boyd said if Saskatchewan had made a decision to curtail oil, it wouldn't have changed Alberta's path forward.

The bounce helps to explain the Canadian dollar strength today. The government says the reduction will be in force until excess storage is drawn down, after which it will drop to an estimated average of 95,000 barrels a day. Companies like Cenovus Energy Inc and Canadian Natural Resources Ltd are vocal supporters of the move, with Cenovus saying the move will help it maintain capital spending to prepare it to move more oil when more pipelines are available in 2020. This is especially true if companies with their own US refining capacity, like Husky Energy Inc., Imperial Oil Ltd. and Suncor Energy Inc., decide to squeeze their own workers till the pips squeak to punish the government for reducing their profit expectations for the greater good.

More broadly, the slide in USA oil followed a tumble in global stock markets on Tuesday, with investors anxious about the threat of a widespread economic slowdown. "They're not as big a player as us but they're still a player", McCuaig-Boyd said. "The poor finish to Q3 GDP had already put our call for a January rate hike by the Bank of Canada at risk, so we'll need to see some healthy readings for other sectors in the next few weeks to leave that view intact".

Canada's announcement to enforce mandatory production cuts starting next month will make moving crude on trains less attractive just as the government buys railcars.

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