By Vipal Monga and Stephanie Yang
Canadian crude prices have surged to trade at the smallest
discount to U.S. oil in a decade, marking an early success for
provincial-government efforts to cap supply and boost the country's
income.
A blend of Canadian crude has rallied as much as 41% since early
December, when the government of the oil-rich province of Alberta
forced producers to cut output by nearly 9% in a bid to lift
depressed prices. Prices for Western Canadian Select traded at
$41.83 a barrel on Thursday after a sharp decline that day,
according to S&P Global Platts.
The provincial government directed the cuts after Canadian crude
prices traded at a steep discount to U.S. oil, reaching a record
difference of more than $51 a barrel in October. By Friday, that
gap had narrowed to less than $7, the lowest since March 2009,
according to RBC Capital Markets.
"The forced cuts caught us all by surprise," said Scott Shelton,
a broker at ICAP PLC. "Most people, including myself, saw no hope
for Canadian differentials for another year or so."
Canadian crude has rebounded on expectations that the cuts will
help draw down inventories, and likely was aided by a scramble
among traders to cover short positions on physical barrels. But
some analysts say that the government cap, which is set to expire
at the end of the year, will only act as a temporary fix for
Canada's problems, leaving the risk that prices can fall again.
Alberta's mandated curtailment -- an extraordinary intervention
in Canada, the fourth-largest oil producer in the world -- was
criticized by large oil producers in the province including Suncor
Energy, and Exxon Mobil-controlled Imperial Oil Ltd., as an
unwarranted interference in free markets.
Suncor said in a statement shortly after the output cut was
announced, "In the short term, the Government of Alberta action has
resulted in winners and losers in the market."
An Imperial Oil spokesman said the company disagreed with the
mandatory cuts and argued they could hurt investment in the
province's transportation infrastructure. "This government action
creates long-term market uncertainty, and reduces any incentive for
market participants to invest in crude oil processing facilities or
commit to long-term transportation arrangements, including rail,"
said the spokesman.
Inventories had been rising through the end of last year, but
research firm Genscape Inc. said stockpiles in Western Canada fell
by 2.5 million barrels for the week ended Jan. 11, suggesting the
output cuts are working.
The rally in Canadian crude coincides with a volatile period in
global energy markets. Oil prices world-wide tumbled late last year
on concerns of softening demand and rising supply. Efforts by major
producers to curtail output and a more stable global economic
outlook have boosted U.S. prices nearly 15% to $52.07 a barrel this
year.
But in Canada, infrastructure bottlenecks have plagued the
energy industry over the past year. Crude inventories jumped last
year on a lack of pipeline space needed to carry oil from
landlocked Alberta to U.S. refineries. That left shippers with few
options to sell their crude, weighing on regional prices.
Now, while prices have rebounded, the industry is grappling with
the issue of losing money on each barrel of crude they send south
by train.
Moving a barrel from terminals in Alberta to the U.S. Gulf Coast
costs between $9 and $12 by pipeline, and between $18 and $20 by
rail, said Mike Walls, an analyst with Genscape. That price tag
exceeds the current premium of U.S. crude to Canadian, putting
shippers at risk of missing out on profits even after Canadian
prices rose.
As things stand, a shipper could lose roughly $9 for every
barrel sent to the Gulf by rail.
Many shippers also likely signed longer-term contracts to
transport by the more costly option of rail. Such parties are now
pressured to fill those rail commitments even with a narrower price
spread, said Rusty Braziel, president of RBN Energy LLC.
"From the standpoint of somebody who has made those commitments,
it's the worst possible thing that could happen," Mr. Braziel
said.
Suncor Energy, one of the oil sands producers that criticized
Alberta's intervention, said the current prices make it difficult
for the company to ship its crude out of the province by rail.
"Rail transportation is uneconomic," said Sneh Seetal, a
spokeswoman for the Calgary-based company.
Alberta's leader, Premier Rachel Notley, cautioned that the
recent price increase could be followed by a retreat in coming
weeks. Her government has been lobbying the federal government,
under Prime Minister Justin Trudeau, to push through pipeline
construction to take oil out of Alberta.
Futures markets indicate that traders expect the Canadian
discount to widen again in coming months, with contracts for July
delivery trading at an estimated difference of $17.80 a barrel,
closer to the cost of rail transportation, according to CME
Group.
"It's good that we've been made to drive the price up a little
bit but we also know that we can't count on that," Ms. Notley said
during remarks to reporters on Tuesday. "We have to find
longer-term, more sustainable solutions."
Write to Vipal Monga at vipal.monga@wsj.com and Stephanie Yang
at stephanie.yang@wsj.com
(END) Dow Jones Newswires
January 17, 2019 17:53 ET (22:53 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.