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The Canadian OPEC: Are Alberta’s Output Cuts Sustainable?

Rig

Alberta Premier Rachel Notley has moved to the ranks of Saudi Crown Prince Mohammad bin Salman and Russian President Vladimir Putin by dictating production cuts, targeted at the short-term removal of a dangerous supply glut that has sent Western Canadian grades plummeting, some of them to single-digit territory. The plan has largely worked – as opposed to the autumnal months of 2018, it is not the Canadian grades’ price but the WTI-WCS differential that is now single-digit. Yet uncertainties are creeping up over the long-term sustainability of Alberta’s production cuts and oil producers have been increasingly vocal in demanding clear legal guarantees that the December 02 decision is not to repeat itself further on.

The markets reacted to the production cuts immediately. If during the week prior to the announcement of the curtailments the Western Canadian Select (WCS) - WTI CMA differential averaged -32 USD per barrel, it skyrocketed to -11 USD per barrel within four-five working days and has remained more or less at the same level since. The gaping hole between WCS priced in Hardisty and WCS Cushing has narrowed significantly. If on November 30, the last working day before the December 02 announcement, it amounted to -23 USD per barrel, by January 11 it edged up to as close as -3 USD per barrel, only to ease off to the current level of -6-7 USD per barrel (see Graph 1). One might even say that the actual developments have surpassed Canadian expectations…




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