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With Canadian crude oil prices climbing higher, the Alberta government loosened the production cut imposed at the beginning of January by 100,000 bpd and has plans to further relax it next month. This month, local producers can extract 3.66 million bpd of heavy crude.
“A short-term production limit is not ideal or sustainable, which is exactly why we have a plan to move more oil by rail in the coming months while we fight for the long-term solution of building pipelines to new markets,” Premier Rachel Notley said, also acknowledging that the cuts had served their purpose: “The decision to temporarily limit production was applied fairly and equitably, and our plan is working to stop allowing our resource to be sold for pennies on the dollar.”
However, the lower cuts of 95,000 bpd that Notley announced in December will likely stay in place as planned until the end of the year. The purpose of the initial, higher cuts, of 325,000 bpd, was to reduce the inventory overhang, which has now fallen to a more manageable level and the discount of Western Canadian Crude to West Texas Intermediate has narrowed substantially. Last year, the discount at one point exceeded US$50 a barrel. Now, it is in the single digits.
This latter fact, however, has had some analysts worried that refiners will start seeking cheaper alternatives to Canadian crude. What’s more, one Scotiabank analyst said the production cut had already affected the profitability of oil-by-rail transportation in a negative way and the discount had to widen again to make this way of transporting crude profitable again.
"The curtailment has either taken initially too much oil or took it off the market too quickly," Rory Johnston told CBC this week. Alberta’s government, pressed for oil transport capacity, earlier announced it would buy 4,400 rail cars to ship more oil by rail as new pipelines have yet to be built if at all.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.