Amidst the Gloom: Positive News Headlines for Canadian Oil

 

The Canadian oil market remains oversupplied from a surge of oil sands production that has exceeded takeaway capacity and caused record breaking price discounts (see October 30th  ARC Energy Ideas “Light at the end of the Pipeline”).  Amidst the gloom of today’s extreme price discounts, don’t lose sight of the positive news. The announcements over the past week are meaningful in helping to balance supply and demand.

The long-term fix for the Western Canadian oil market is more pipeline capacity. Last week, Enbridge announced that the new Line 3 replacement project is targeted for operation on November 1, 2019,[1] this should add 370,000 B/d of new capacity in one year’s time.  In the meantime, near-term tactics for reducing the surplus are coming into play, including increasing crude-by-rail and production curtailments.

Crude-by-rail is growing.  Last Friday, Imperial Oil reported plans to increase crude-by-rail between 15,000 and 25,000 B/d in the fourth quarter, they intend to increase railway transport more in the New Year.[2]  Cenovus Energy has signed contracts with Canadian railways for moving 100,000 B/d next year.[3]  Canadian Natural Resources Ltd (CNRL) predicts that total rail loadings in Western Canada will increase by 150,000 B/d in the next 9 months.[4]

Another fix to the oversupply is curbing production. Western Canada oil output has reached record high levels and the storage tanks are filled high. To help clear the glut, some producers are voluntarily crimping supply. CNRL is shutting in 45,000 to 55,000 B/d in the next few months [4].  Cenovus Energy, Baytex Energy and MEG Energy have also released plans to reduce rates.  All together, we estimate about 80,000 B/d of curtailments have been announced.  While some of the announced cuts could be offset by other potential volume growth, including the newly minted Suncor Fort Hills mine that is still ramping-up to its full capacity, on balance the basin’s output is slowing.

Some producers are calling for government intervention in reducing supply. CNRL’s executive vice-chairman, Steve Laut suggested the Alberta Government should consider forcing producers to temporarily cut back their production to help reduce the surplus.[5] While good in theory, in practice forcing cuts could be complicated because of the potential for inequitable treatment for some producers at the expense of others.

There was also information about the new refinery near Edmonton last week. In their quarterly conference call, CNRL said the Sturgeon Refinery plans to start consuming 80,000 B/d of Canadian bitumen blend in the near future. All things the same, this local consumption should reduce heavy oil exports by an equal amount.[6]

While more still needs to be done to fix the Canadian oil rout, it is encouraging to see constructive actions pointing towards solutions. The market is doing what it does best: clearing out distortions and arbitrages.

 

[1] DOB, November 2, 2019, Enbridge Targeting Nov 1, 2019 for Line 3 Replacement Start Up, https://www.dailyoilbulletin.com/article/2018/11/2/enbridge-targeting-nov-1-2019-for-line-3-replaceme/

[2] DOB, November 2, 2018,  Imperial Oil Currently Railing 110,000 BBls/d on Rail, Ramping Up  https://www.dailyoilbulletin.com/article/2018/11/2/imperial-currently-running-110000-bblsd-on-rail-ra/

[3] DOB, October 31, 2018, Cenovus Deferring some Production, CEO Encourages Others to do the Same https://www.dailyoilbulletin.com/article/2018/10/31/cenovus-deferring-some-production-ceo-encourages-o/

[4] DOB. November 1, 2018, CNRL Shuts-In Some Heavy Oil Production Amid Weak Market Conditions https://www.dailyoilbulletin.com/article/2018/11/1/cnrl-shuts-in-some-heavy-oil-production-amid-weak-/

[5] Calgary Herald, November 1, 2018 Canada’s Biggest Producer Urges Province to Regulate Oil Output https://calgaryherald.com/business/energy/varcoe-big-deal-for-encana-canadas-biggest-producer-urges-province-to-regulate-oil-output

[6] CNRL Q3 2018 conference call, November 2, 2018