The ‘Venezuela Benefit’ For Canadian Oil Producers Is Limited

Canadian oil producers are keeping a close eye on the latest events in Venezuela and the opportunity to boost their exports south of the border if things in the troubled South American country continue to deteriorate, pressing its already falling oil production even lower.

In a recent analysis of the topic, CBC News' Tony Seskus notes that Canada and Venezuela are the two primary sources of heavy crude for Gulf Coast refiners, so of Venezuela's production continues down in case of further instability, Canadian producers stand to benefit. However, Seskus adds, these benefits will be limited.

The primary reason for the limitations is, of course, pipeline capacity. Canada's oil producers are moving growing amounts of crude to the Gulf Coast by rail even if it is costlier, because there are simply not enough pipelines to use.

On the plus side, the price of the local crude has been growing after Alberta Premier Rachel Notley imposed a production cut of over 300,000 bpd this month to clear out excess inventory and push up historically low prices. Now that the country apparently has two rival presidents, production is bound to fall further, pushing Canadian crude prices even higher.

This has some industry observes and insiders worried that Canadian crude will become less competitive. However, commodities-and any other goods for sale-can only be referred to as competitive if there is competition. The latest EIA import figures, for October 2018, reveal that U.S. refiners imported 3.63 million bpd from Canada, 671,000 bpd from Mexico, and 506,000 bpd from Venezuela.

So, Canada is clearly in the lead, even though it is not even the primary source of heavy crude for Gulf Coast refineries: "They were getting most of their heavy crude from Venezuela and Mexico - and a little bit from Canada. Now, with the concerns in Venezuela, that means those refineries are looking north to Canadian producers," Seskus quotes the president of the Canadian Energy Research Institute, Allan Fogwill, as saying. Related: Modest Rig Count Gain Caps Oil Prices

So far so good, but there is already concern Canada's oil industry won't be able to materialize these benefits in full. The culprit, yet again, would be lack of sufficient cheap transportation capacity. While little can be done about pipelines as things stand right now, railway transportation is expanding and will likely continue to expand with greater demand. The latest weekly data, to January 11, revealed a record-high oil-by-rail transportation rate of 356,000 bpd.

There seems to be also worry that the benefits from Venezuela's turmoil for the Canadian oil producers will be limited in time: if there is a government change and the opposition leader, Juan Guaido, takes the helm, he will likely receive a lot of foreign support to revive Venezuela's oil industry, diminishing the attractiveness of Canadian crude.

Realistically, this latter concern belongs to the future. Venezuela's oil industry has been battered for years by underinvestment and mismanagement. That's not something you can reverse in months. For now, therefore, the news for Canadian oil producers remains overwhelmingly good. Demand for Canadian crude will be growing and so will margins.

By Irina Slav for Oilprice.com

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