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Lindsay Redifer

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Oil Price Rally May Not Be Enough To Help Canadian Drillers

Oil producers in Alberta, Canada had the headache of high supply next to thin margins this week, but a quick price rally brought a moment of relief — though experts don’t expect it to last.

Canada is feeling the pinch of the bottleneck effect: too much oil and not enough transportation. Alberta has access to the Keystone pipeline that carries oil into Oklahoma and Illinois. This pipeline had a major spill last November. 210,000 gallons spilled into the soil, making it the largest on-shore oil spill in the past eight years. The accident brought transportation of oil down significantly and resulted in a buildup of excess oil.

The Keystone is maintained by TransCanada (NYSE:TRP), a company that runs a vast network of pipelines for natural gas as well as crude oil. The spill happened in South Dakota and an effort to clean up the damage was reported by CTV as halfway finished.

TransCanada spokeswoman Robynn Tysver spoke with Aberdeen American News about the cleanup effort. “We are now working to replace the top soil, with plans to seed later in the spring," Tsyver said.

On top of this recent spill, Canadian railways are reluctant to transport oil when they’re already focused on wheat shipments. To up pressure even more, Sunhill Energy Inc’s Fort Hills mine expanded its oil sands production successfully, adding to the supply.

The excess oil and lack of movement led to a price drop. The rally came to the rescue of crude oil and oil sand workers, but its effect is temporary.

For the moment, Western Canada Select (WCS) oil trades at $20.50 per barrel below West Texas Intermediate (WTI). This is the smallest it’s been since December 7, 2017. The spread is down from a four-year maximum of $32 on January 31. Related: U.S., Canada Face Off For LNG Dominance

Tudor, Pickering, Holt & Co. analyst Matt Murphy explained the situation to Reuters in a recent article. Murphy stated that Enbridge Inc. operates the biggest Canadian pipeline for oil and helps manage space when supply is on the rise. Enbridge reported rationing as much as 51% of the space in its lines in March 2017. That was much more than the previous month — yet another consequence of the increase in product output.

The price rally was tied to this group as well as the demand for extra barrels. Excess orders ensure that no oil company runs out when supply is low, so the abundance of purchases are common practice according to Murphy.

A price rally usually follows a low period in which prices either plateau or decline. As this demand is being met by sellers with an influx as opposed to a lack of crude oil, the rally can’t continue. As more Canadian oil hits the market, prices are expected to drop.

Not everyone is feeling pessimistic about the situation. Some see it as a mere hiccup in the everyday workings of the oil industry.

Cenovus Energy (NYSE:CVE) CEO Alex Pourbaix told Reuters that prices will strengthen as soon as the pipeline is repaired and running at full capacity. He also expects the railway system to play a part and effect pricing with transportation support. He referred to the high output as a “fairly small imbalance in a supply and takeaway capacity,” in a conference call on Thursday, February 15. Related: Saudi Arabia Wants $70 Oil

GMP Energy Analyst Michael Dunn sees it differently. He told Reuters that there is no relief valve in sight. A restricted pipeline, full inventories and a heavy amount of production continues with no solution to manage it all.

In 1985, oil price controls were eliminated by the Western Accord, which also did away with taxes between provinces Alberta, British Columbia and Saskatchewan. Between the accord and NAFTA, oil has flown from Canada to the U.S. at a steady stream. Now, Justin Trudeau wants to take another look at the oil agreement. His hope is to streamline the approval process for new pipelines while still assessing their impact on the environment and the people living near any major crude oil lines.

Canada’s oil production shows signs of slowing, and more pipelines may be the best solution. However, they can also present more issues, as the Keystone proved last year with its massive spill. The market wants oil from Canada, but Canadian oil companies will need more management and steady prices as opposed to last-minute scrambling.

By Lindsay Redifer for Oilprice.com

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