Page 4 - NorthAmOil Week 02

NorthAmOil COMMENTARY NorthAmOil
Bad news, good news for Canadian producers
There are concerns that differentials between Western Canadian crude prices and WTI could blow out again, but news that TC Energy is restarting pre-construction work on Keystone XL comes as a positive development for regional producers
WESTERN CANADA
WHAT:
There are warnings that the price of Canadian crude could fall against WTI again.
WHY:
A lack of takeaway capacity out of Western Canada continues to weigh on regional oil prices.
WHAT NEXT:
TC Energy is preparing to resume pre-construction work on Keystone XL.
THE year has started with a mix of good news and bad news for Western Canada’s oil produc- ers. The region – particularly the province of Alberta – was hit particularly hard by the col- lapse in crude prices, coupled with oil sands projects falling out of favour on concerns over the volume of greenhouse gas (GHG) emissions they generate. Exacerbating the situation for Alberta has been a pipeline capacity crunch that is weighing on regional crude prices and acting as a disincentive to future oil industry invest- ment until the bottleneck can be alleviated.
The impact of the pipeline shortage has been evident for some time, with the previous Alberta government bringing in an obligatory limit on provincial crude production last year in an effort to prop up the price of Western Canadian Select (WCS). There were hopes that the United Conservative Party (UCP), which took power in the province in April 2019, would quickly put an end to the output curtailment, but so far the limits have only been relaxed, while also being extended until the end of 2020. And in the absence of new pipeline capacity, the provincial government could find itself forced to extend the curtailment further still.
Differential blowout
Alberta initially introduced its production cap after the differential between WCS and West Texas Intermediate (WTI) blew out to a record high of around $50 per barrel in late 2018. The curtailment immediately helped WCS prices to rebound after it was introduced. However, over the past week, new warnings have come that another blow-out could be looming for Alberta’s producers, as WCS has traded at considerably lower levels than the US benchmark once again.
Last week, the differential widened to just over $24 per barrel – the widest it had been since November 30, 2018, the last trading day before plans for the production cap were unveiled. This prompted warnings from analysts, including one from Credit Suisse, Manav Gupta, who said in a report this week that widening differentials suggested that Canadian oil was at high risk of a blow-out. If the differential were to widen beyond $25 per barrel, the “Alberta government might be forced to step back in and raise the volumes on mandated cuts to control bloating inventory situation”, Gupta added.
The widening differential comes against the backdrop of dramatic – but short-lived
Oil sands producers are grappling with low prices for their crude coupled with environmental opposition.
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Week 02 15•January•2020