DOWN BUT NOT OUT
Oil producers in Canada are optimistic demand will rise next year,
The sun will come out tomorrow, or at least some time next year.
That’s the message from Canadian oil producers suffering from the worst domestic glut in at least a decade.
Even as prices dipped to new lows last week, some companies including Suncor Energy Inc. and Canadian Natural Resources Ltd. see reasons for optimism. Enbridge Inc.’s Line 3 pipeline is scheduled to be expanded and more oil is moving by rail. But for now, some producers are choosing to cut output rather than sell at current regional prices.
“Demand for these products is coming up,” Suncor CEO Steven Williams said in a conference call Thursday. “Rail movements are starting to ratchet up, and of course, we had good news this last week about Line 3 progressing.”
Canadian crude prices collapsed last month as a surge of new oilsands production and output from the shale formations of the Montney and Duvernay encountered pipeline bottlenecks and reduced U.S. demand amid refin- ery maintenance.
Heavy Western Canada Select fell to a discount of more than $50 a barrel to West Texas Intermediate futures last month, the biggest in at least a decade. Light Edmonton Mixed Sweet reached its widest in Bloomberg data back to 2014 Thurs- day, while light synthetic crude fell to its widest since 2006.
Husky Energy Inc., which is seeking to buy rival MEG Energy Corp., is less optimistic, according to CEO Rob Peabody.
“We are assuming that high differentials continue certainly the rest of this year, all of next year, all of the year after that,” Peabody said in an Oct. 25 conference call. “And then, we start seeing some structural relief from some of these pipelines if they come on according to the kind of current schedule.”
Amid the glut, Canadian Natural said Thursday it would shut as much as 55,000 barrels a day of mostly heavy oil output in November and December after smaller cuts in October. Cenovus Energy Inc. is running its Foster Creek and Christina Lake projects at reduced rates and has stored some production in salt caverns, the company said Wednesday.
Some relief is on the horizon. Most immediately, U.S. refineries that take Canadian crude are scheduled to return from maintenance this month, boosting crude demand.
“As those refineries come back up, that should allow you to start drawing down inventories,” Randy Ollenberger, an analyst with BMO Capital Markets, said in an interview. “The differential I think should improve for sure in December from this $45 level.”
Longer term, Canada needs to break the logjam of limited export pipeline capacity. Enbridge’s 370,000 barrel-a-day Line 3 pipeline expansion is scheduled to start operating by the fourth quarter of next year.
Line 3 should contribute to some “significant easing” of the differentials by the middle of next year, Alex Pourbaix, Cenovus CEO, said on a conference call Wednesday.