Canadian Heavy Crude Surges After Alberta Imposes Oil Cuts

Premier Rachel Notley in a Postmedia file

Canada's main stock index began the week higher as investors felt relief from a preliminary trade truce between the US and China and oil prices got a lift in part from Alberta production cuts. While some companies will also benefit, those with their own refining and upgrading operations may not.

"We will continue to work with industry to make sure that this curtailment is done in a way that is most effective, and that is responsible, and ensures that we don't curtail one extra drop more than we need to", said Notley. The cuts will be spread among companies producing at least 10,000 bpd, based on average production.

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.

"In the last few weeks, this price gap has reached historic highs", Notley said Sunday in a speech timed to run live on supper-hour newscasts in Alberta. The NEP remains infamous in Alberta, seen both as shorthand for government overreach and a reason to be wary of leaders named Trudeau. The move was a bid to keep the project alive after Kinder threatened to walk away amid fierce opposition from British Columbia.

On Dec. 2, Alberta Premier Rachel Notley announced a temporary mandatory oil cut of 325,000 bbls/d to address the province's current storage glut, a result of insufficient pipeline takeaway capacity.

Not all the producers were happy with the Notley's order, with critics arguing that the markets can deal better with prices. The clear failure of the federal government to build pipelines and ensure market access for our energy products has had a great cost on the economy and the people of Saskatchewan.

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Some in the industry outright oppose the measure. The cut seems to be working, however, and that should be welcome news right now: yesterday Reuters reported weather-related power disruptions had occurred on two major Canada-U.S. pipelines, Keystone and the Mainland system. Imperial Oil Ltd. made similar comments. In the meantime, the WCS discount of around $40 per barrel is probably too much to bear for many oil producers.

Carlo Dade, an expert on Canada-U.S. trade at the Canada West Foundation, doesn't think Alberta's curtailment violates the North American Free Trade Agreement, which is still in effect.

The government should immediately assess what natural underground storage capacity exists or can be readily created in Alberta.

"Government intervention is never the preferred route, but because of the crisis that's taken place in Alberta and Canada, we can understand that this is the route taken", Fagerheim said. "We interpret the phrasing of the announced cut as keeping production down 50 kb/d [year-on-year] in 2019 and 200 kb/d below our prior assessment with the greatest impact on 1Q19 (down 225 kb/d quarter-on-quarter) before new rail capacity gradually comes online from April onward", Goldman Sachs wrote in a note. "We are recognizing that there are going to be some unpredictable consequences and they are going to try and monitor it closely".

Or as Larry Berman, chief investment officer at ETF Capital Management, put it bluntly in an interview with BNN Bloomberg Television: "I hate governments intervening like this, but we were getting desperate here".

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