Price rise little comfort for Canadian heavy oil
• The outlook for Canadian heavy oil producers remained largely unchanged Monday, even after a joint statement by Russian and Saudi officials to extend OPEC production cuts lifted prices above last week’s lows.
Prices for crude benchmark West Texas Intermediate neared the US$ 50 threshold in Monday trading, before closing at US$ 48.85, up US$ 1.01 The rise came after Saudi Energy Minister Khalid al-Falih and Russian Energy Minister Alexander Novak reached a verbal agreement on Monday to extend their supply curbs to March, 2018, three months longer than many had predicted. The gesture calmed oil markets after a few turbulent sessions last week that sent prices plummeting.
However, the price increase is little comfort to Canadian oilsands producers, particularly as some analysts expect them to face a deeper discount for their crude in coming years relative to the U.S.
“We are also expecting a widening — sometime late next year, likely — because of pipeline constraints,” said Rory Johnston, a commodity economist at Sco- tiabank in Toronto. He said he estimates the spread between Western Canadian Select and WTI will widen to around US$ 18 a barrel in 2018, up from US$ 15.60 in the first 41/2 months of 2017, as more oil is expected to be shipped by rail.
The widening discount for Canadian crude would mark yet another setback for producers, who have been anticipating a rise in prices that has yet to materialize. New oil developments in Canada remain a long way off as prices remain locked at the US$50 range, much lower than analyst expectations one year ago.
“When it comes to these brownfield developments, t he diff erence between US$50 and US$55 is not major,” said Nicholas Lupick, an analyst with AltaCorp Capital Inc. in Calgary. “For a greenfield project you will need something closer to US$60.”
Stubbornly low oil prices come as some Canadian players make massive bets on the oilsands. In March, Canadian Natural Resources Ltd. purchased Royal Dutch Shell PLC’s oilsands stakes f or $ 12.74 billion, while Cenovus Energy Inc. bought ConocoPhillips Co.’s assets in the oilsands and Alberta Deep Basin for $17.7 billion.
Suncor Energy Inc., mean- while, bought out oilsands rival Canadian Oil Sands for $6.6 billion in early 2016.
Such acquisitions have weighed heavily on company balance sheets, as they assume sizable debt loads to fund the purchases. Cenovus in particular has said it aims to sell a range of assets following the acquisition, which at the time caused its share price to tumble.
Canadian and other companies are closely watching OPEC moves ahead of a planned meeting in Vienna on May 25, where the group will decide whether to extend its production agreement signed last November.
Pressure has been mounting on OPEC to extend its production c urbs af t er agreeing in November to collectively cut supplies by 1.2 million barrels per day (bpd) in a bid to raise prices. NonOPEC members cut another 600,000 bpd as part of the deal.
OPEC officials at t he time were confident that a six- month cut would be sufficient to rebalance the market. However, surging production in the U. S. has put a cap on prices, forcing the group to ponder an extension of the cuts.
OPEC officials also face rising domestic discontent, as leaders are forced to slash public spending and subsidies.
The U. S. Energy Information Administration estimates that OPEC oil export revenues totalled US$ 433 billion in 2016, a 15-per-cent drop from the year prior and the lowest level since 2004.