Alberta intervention seen as boost for oil prices

‘Heavy-handed’ measure won’t solve longer-term challenges, analysts say

OTT A WA Alberta’s mandatory cut in oil production is likely to succeed in driving up Canadian crude prices in coming months, but the “heavy-handed” intervention will not alleviate longer-term issues facing the oilpatch, analysts said.

On Sunday, Alberta Premier Rachel Notley introduced a production cut of roughly 325,000 barrels per day, or just under nine per cent of the Alberta market, as a way to curb the record-high oil price discount faced by Canadian producers. The curbs will begin January 2019. The Alberta government hopes to roughly cut in half the 35 million barrels of oil sitting in storage across the province — a reduction analysts said could be achieved in a matter of months.

“You get there by next spring, which is very quick,” said Michael Tran, analyst at RBC Capital Markets in New York. “While 325,000 barrels per day is not going to meaningfully impact the global oil balance, it’s extremely influential for really kick-starting Canadian oil prices.”

He added that the cuts were a “heavy-handed mechanism” to raise prices.

Western Canadian Select, the heavy oil benchmark in Canada, soared nearly 37 per cent on Notley’s announcement, up to US$29.95 per barrel, according to Bloomberg data, with the blend trading in the low US$20 range below the U.S. crude, compared to US$32 before the announcement.

Rory Johnston, analyst at Scotiabank in Toronto, said the cuts could narrow the discount for WCS to about US$20 in the first quarter of 2019, from an earlier estimate of US$29.

The decision by Notley to curb oil supplies marks the most substantial market intervention in decades, and comes after discounts for Canadian heavy oil breached US$50 in recent months, the highest on record.

While producers said they would comply with the mandatory cuts, executives from Canada’s Suncor Energy Inc, Husky Energy Inc and Imperial Oil, integrated producers with domestic refinery and upgrading capacity, expressed disappointment.

“We believe the market is working and view government-ordered curtailment or other interventions as possibly having serious negative investment, economic and trade consequences,” Husky said in a statement.

However, other major producers such as Cenovus Energy Inc. and Canadian Natural Resources Ltd. were vocal in their support.

“When you are just breaking even or you are actually losing money, you can do nothing other than the bare minimum ... It’s pure survival mode,” Cenovus chief executive Alex Pourbaix said in an interview.

Financial Post with files from wires