Gluts, price differential: Six things to know about Canada's oil-price gap

Roman Schwartz
December 6, 2018

Alberta Premier Rachel Notley said Sunday night oil producers will need to cut output by 325,000 barrels a day, or 8.7 per cent, starting in January.

Western Canada Select crude's discount to US benchmark West Texas Intermediate oil narrowed on Monday to the tightest since July.

Oil prices were pressured by a weekly report from the American Petroleum Institute (API) that said U.S. crude inventories rose by 5.4 million barrels in the week to 30 November, to 448 million barrels, in a sign that USA oil markets are in a growing glut.

Alberta now produces 190,000 barrels a day more than can be shipped and has twice the normal levels of oil in storage - a total of 35 million barrels.

The Government of Saskatchewan will not be following Alberta's lead in cutting oil production to help improve heavy oil pricing.

Canada's oil production is at a record 4.6 million barrels a day, but producers can not get oil to market because the pipelines that cross into the United States are full.

It costs about $22 to ship crude via rail from Alberta to the Gulf, market sources told Reuters.

Canada is the United States's top supplier of crude, sending more than 3.3 million barrels south daily, according to the National Energy Board.

Moe said the decision was made "upon the advice from industry". 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.

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Grant Fagerheim is the president and CEO of Whitecap Resources Inc. which does work in Alberta but has 60 per cent of its production in Saskatchewan.

Alberta's plan appears to be carefully devised, he said, and even if rising prices cause American refiners to grumble, they'll continue to take Alberta oil because they're facilities are set up for it.

Western Canadian Select prices averaged $44.45 during the 10 months to the end of October although this was due to prices having spent some time around $70 before hogging the $50 level for much of the rest of the time.

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. The province estimates 25 producers will have to impose cuts.

Conversely, S&P Global Platts' Critchlow said Qatar's exit from OPEC is not only a "big" event, but likely the most impactful event over the past two decades. "We will review the amount every month and adjust as needed". But she has said that rail cars, new pipelines and increasing domestic refining capacity would not bring relief soon enough.

Demand for condensate, a very light oil blended with thick oil sands crude so it will flow through pipes, is expected to fall as producers cut heavy output, analysts say.

Crude-by-rail shipments already increased to a record in September - almost 270,000 bpd - but the differential continued to grow.

Clugston has said in the past that he supports pipelines, but isn't convinced the Trudeau government understand the issue.

But the Court of Appeal sided with environmentalist and indigenous opponents of the project in an August ruling, leading the federal government to give up fighting and darkening the outlook for investment, oil prices and the Loonie.

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