Western Canadian oil prices surged Monday on Alberta Premier Rachel Notley’s intervention to cut production, even as global political manoeuvring drove international crude prices higher.
At a cabinet meeting Monday, Ms. Notley again pressed Prime Minister Justin Trudeau to provide support for the beleaguered oil industry after her order to oil companies to cut production by 8.7 per cent in the new year.
The Canadian price improved against international prices even as the broader market roared to life. Traders reacted Monday to signs of a truce in the looming U.S.-China trade war and a likely production agreement between OPEC and Russia later this week.
“We need them to toss the half-hearted statements away. We don’t actually need Ottawa’s sympathy, we need Ottawa’s full attention," she told her cabinet colleagues, who approved the production cuts announced on Sunday. “We need them to step up and bring an end to this crisis.”
The Alberta government is requiring major producers to cut a total of some 325,000 barrels a day of production, though several companies have already announced reductions of some 150,000 barrels a day which will be included in the final count. Ms. Notley said the intervention was necessary to deflate a glut of crude inventories that built up as growing production this year exceeded the capacity of pipelines and rail to get the oil to markets.
In Ottawa, Natural Resources Minister Amarjeet Sohi said the federal government is considering Alberta’s request for support to buy new railcars in order to increase export capacity. He added Ottawa remains focused on the long-term solution, arguing it made a “courageous decision” when it acquired the Trans Mountain pipeline system for $4.5-billion and is moving forward toward its completion. However, the pipeline expansion is not expected to be completed for at least three years.The Federal Court of Appeal ruled this summer that the government has to review the regulatory process behind the expansion.
Traders reacted sharply on Monday, as the gap between various Western Canadian crude prices and the North American benchmark, West Texas Intermediate (WTI), narrowed dramatically. Western Canadian Select (WCS) – the benchmark for heavy oil – traded late Monday at a discount of US$23 a barrel for January delivery below WTI, which sat at US$53.45, according to NetEnergy, a Calgary-based trading company. The WCS differential is down from US$28.80 a barrel on Friday. At one point last week, the WCS price was as low as US$10 a barrel.
“The sheer size of the mandated cut is going to help the Alberta government achieve its desired impact on inventories and prices," Royal Bank of Canada analyst Michael Tran said Monday. He said inventories should return to normal levels by mid-April, at which point the government-imposed cut would be 95,000 barrels a day until the end of the year.
West Texas Intermediate rose by US$2.02 a barrel to US$52.95, or roughly 4 per cent, while the international benchmark Brent climbed 3.8 per cent to US$61.69 a barrel.
At the G20 meeting in Argentina on the weekend, U.S. President Donald Trump and Chinese President Xi Jinping agreed to a 90-day cooling off period to give negotiators time to head off another damaging round of tariffs.
At the same meeting, Russian President Vladimir Putin and Saudi Arabia’s Prince Mohammed bin Salman agreed to support a production cut to be finalized at this week’s gathering of OPEC and its non-OPEC allies.
The Organization of Petroleum Exporting Countries is expected to agree to cut production by more than one million barrels a day in order to support global prices, which have slumped since early October, analysts from TD Securities Inc. said in a note Monday.
However, the cartel is fractious and agreement is not certain. Qatar announced it would be leaving OPEC in January. The emirate, which is facing a Saudi boycott, is a major natural gas producer but has seen its oil production slump in recent years to about 600,000 barrels a day.
As Canadian oil prices rose Monday, so too did company shares. The Toronto Stock Exchange’s capped energy index gained nearly 4 per cent on the day, though the market reflected the deep split within the industry as companies with large refining operations lagged the non-integrated producers.
Cenovus Energy Inc., which led the campaign for government intervention, jumped nearly 12 per cent to $10.99 a share, while Canadian Natural Resources Ltd., which also supported the government-mandated production cuts, was up 9.5 per cent to $36.58.
Cenovus chief executive Alex Pourbaix said the company had already announced it was reducing production by 10 per cent in response to depressed prices and so does not expect to have to make further cuts. “This will not have an incremental impact on us,” he said in an interview.However, the company plans to bring a new phase of its Christina Lake in situ project into production in the second half of 2019, and will have to determine how to manage that additional 50,000 barrels a day of production.
In contrast, Imperial Oil Ltd. lost ground, falling 3.74 per cent to $38.09. Imperial Oil chief executive Rich Kruger issued a statement on Sunday night condemning the Alberta government and warning of negative fallout from investors. Shares in Suncor Energy Corp., which had also opposed intervention, were essentially flat, rising 9 cents to $42.93 a share.
Prior to Ms. Notley’s announcement, Canadian prices were expected to recover from their recent depths as several companies proceeded with their own production cuts and major U.S. refiners that had been down for maintenance returned to service. Bank of Nova Scotia energy economist Rory Johnston had been forecasting a WCS-WTI discount of US$29 a barrel in the first quarter of 2019, but now expects it to be US$20 as a result of the government-ordered production cuts.
Saskatchewan Premier Scott Moe said on Monday that his province, which accounts for about 12 per cent of Canada’s oil production, will not be following Alberta’s lead. Saskatchewan has been less harshly impacted by the price differential because of its lack of high-cost oil-sands projects.
It remains unclear what impact the production cuts will have on employment in Alberta. Calgary-based oil companies have gone through four years of price slumps and volatility and are already operating at bare-bones level.
A spokeswoman for Suncor said the company does not expect the intervention to cause jobs losses. “Based on what we know today, there’d be no impact to employees,” Sneh Seetal said.