Global Appetite For Canadian Crude Grows Amidst Supply Cuts

Last week, Canada's Prime Minister pledged to the UN General Assembly that he would cap emissions from the country's oil and gas industry this year. Interestingly, the only leaders allowed to speak at the gathering were those who had made firm climate change commitments, and even though Trudeau was among them, he was criticized for the fact that "Canada was one of the largest expanders of fossil fuels last year," per a CBC report.

To the UN general assembly's horror, Canada continues to be "an expander" this year as well. Over this year and next, the industry is seen adding some 375,000 barrels daily to a 2022 daily average output of 4.86 million barrels daily. And more of this is going overseas.

As far as exports go, Canada has been quite limited in the oil department. Almost all of its export oil goes to its southern neighbor. Lately, however, this has started to change as demand for crude grows in other parts of the world while suppliers have not multiplied.

Now, in the wake of the extension that Saudi Arabia and Russia announced of their production and export cuts, appetite for Canadian crude is set to blossom further.

The increase should be especially marked next month, Bloomberg reported last week, citing oil traders. According to them, as U.S. refineries enter the maintenance period, more Canadian crude will be available for other markets via Gulf Coast ports, which will push the total to 11 million barrels. 

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While in absolute terms, the figure may not be particularly significant, the fact that it would be the second-highest export rate on record is significant, as is the fact this will be a sixfold increase in the amount of Canadian crude exported this month.

Saudi Arabia and Russia are collectively withholding 1.3 million barrels daily from global oil markets, notably medium sour grades popular among refiners for making diesel. Russia has additionally announced a temporary ban on diesel fuel exports in order to stabilize domestic prices.

For all the condemnation that hydrocarbons received at the latest UN gathering, demand for them remains as strong as ever. Supply, however, is getting problematic. For importers, this is clearly a problem. For exporters, such as Canada, it is a welcome change from a more or less chronic trouble.

Canadian oil producers already have to deal with more red tape than even their U.S. counterparts due to the federal government's climate change ambitions. They are also under pressure to keep reducing their emissions further, including through the abovementioned cap, which might also effectively put a cap on production by making some of it uneconomical.

This pressure has already yielded results. Over the ten years to 2021, Canadian oil producers from conventional deposits reduced their emissions of carbon dioxide and methane by 24% while boosting output by 21%, the Canadian Association of Petroleum Producers said earlier this month.

In the oil sands, emissions as of last year remained unchanged from 2021, but production expanded by 50,000 barrels daily, S&P Global reported in August. The trend suggested the industry's emissions could peak earlier than expected even as output increased.

That output increase, however, could be called into question by the Trudeau government's effort to reduce the country's emissions footprint by an ambitious 40-45% from 2005 levels by 2030. Demand for oil from overseas would very likely interfere with these ambitions, too.

On the one hand, Trudeau would certainly want Canada to be seen as a serious climate committer. On the other, it would be nice to be seen as a reliable energy supplier to friendly regions troubled by a lack of their own oil production, such as Europe.

The latter perspective could get a major boost next year when the expanded Trans Mountain pipeline goes into operation after a series of delays and cost overruns. The pipeline will divert a bigger portion of Canadian oil sands output to global markets, reducing the amount available to U.S. buyers. This would boost the price of Canadian crude further, even after Saudi and Russian oil returns to the market. Because supply of heavy crude will remain limited.

Of course, all this may change thanks to national and international government efforts to reduce demand for energy in the world's biggest consumers, including Canada and its biggest current export market. It would, however, depend on the success of these efforts, which would, in turn, hinge on the viability of alternative sources of energy.

So far, the availability of alternatives, that is, electricity, has only had limited success in curbing the demand for liquid hydrocarbon fuels despite massive investments. If that track record is any indication, oil demand in general, and demand for Canadian crude specifically, will remain robust. Unless climate-centric governments take direct aim at any and all energy consumption, mandating limits, which is what just happened in Germany.

By Irina Slav for Oilprice.com

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