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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Canadian Crude Price Spike Won’t Last

Earlier this week Bloomberg reported that Canadian heavy crude prices had soared so high after the institution of a production cut in Alberta that some producers were already finding it difficult to sell their crude to Gulf Coast refiners as the gap with WTI narrowed significantly. In fact, Bloomberg’s Robert Tuttle said, quoting traders, Canadian crude had hit US$41 a barrel, about US$10 less than WTI.

The latest price chart for Western Canadian Select, however, suggests that the spike is not across all Canadian heavy grades. As of December 11, the chart says, WCS traded at US$26.65 a barrel, certainly a lot higher than the lows of about US$10 a barrel from last month but quite far from US$40 a barrel.

However, the production cut has not yet come into effect. It was less than two weeks ago that Premier Rachel Notley announced the government of the province will enact an 8.7-percent crude oil production cut to clear excess stockpiles as pipeline bottlenecks and growing volumes of oil being transported by the costlier railway pressured Western Canadian Select to historic lows against the U.S. benchmark, WTI. They will take effect next month, representing a cut of 325,000 bpd.

In other words, the price spike now is probably just a knee-jerk reaction to the announcement of the cuts, but the real effect on prices will emerge when Alberta producers actually start cutting. When that happens, there is a possibility that WCS would climb to US$40 and stay there, putting an end to cheap Canadian crude.

The fact is these production cuts are not the only bullish factor for Canadian crude. Earlier this week, Premier Notley said that Alberta planned to build a refinery in a bid to process more crude locally rather than send it by costly rail south to Gulf Coast refiners, reducing the risk of another price shock like the one that prompted the cuts. Related: Saudi Arabia Under Fire From All Sides

The Globe and Mail reported yesterday, quoting Premier Notley, that Albertan energy companies were interested in expanding the province’s processing capacity. Alberta has four refineries at present, with a combined refining capacity of 475,000 bpd. There are also two other specialized diesel-producing facilities that can refine 110,000 bpd of crude.

Notley said “Let’s stop the talk and start acting, let's start making more of the product that the world needs right here at home” Notley said, adding “The project must make sense for Alberta. It must have a return on investment for Albertans and it must diversify the way we use the energy resources that we as Albertans all own. We need to see jobs for Albertans.”

A new refinery would indeed serve to stabilize prices of Canadian crude, but there is one problem: a refinery cannot be built in a month, even in a year. What’s more, some experts argue that Canada’s oil province already has too much refining capacity and the only solution to its price problem are more pipelines.

One expert, the chief petroleum analyst of En-Pro International, told CBC that even the fourth refinery, the North Sturgeon Upgrader, which only produces diesel, was a mistake. With a price tag of US$7.12 billion and a throughput of just 50,000 bpd, Roger McKnight said, "It's hard to be polite here. That's an awful lot of money for very little return."

With no pipelines in sight, however, a new refinery at least a few years away, and until then so many things can change, including the government of the province, it’s too early to make any suggestions about its potential effect on prices. For now, the cuts remain the one thing Alberta can do to rein in the price of its crude to a more palatable level for the industry.

By Irina Slav for Oilprice.com

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