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Western Canadian, US Bakken crude prices spike after Alberta announces 2019 output cut

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Western Canadian crude oil prices spiked $7.75 Monday after the Alberta government said Sunday that, starting January, it will impose an initial 325,000 b/d curtailment of crude production in the province, intended to reduce oversupply and boost prices from record lows.

The benchmark heavy sour grade, Western Canadian Select at Hardisty, was assessed by S&P Global Platts at the NYMEX WTI calendar-month average minus $21.25/b, up from minus $29/b Friday.

"January has gone nuts," a US crude trader said Monday about the January pipeline cycle for Western Canadian crudes.

Bakken crude oil in the US Midwest also jumped Monday, following Canadian prices. Bakken in Clearbrook, Minnesota, was assessed at a $5.00/b discount to the WTI CMA, $4.70/b stronger from Friday.

Late Sunday, Alberta Premier Rachel Notley said that, staring January 1, Alberta oil production will drop 325,000 b/d for three months, which is the expected time frame for the region to "have enough shipping space to clear the current glut and improve prices." Once that happens, the curtailment will be reduced for the rest of 2019.

In response, Canada's Suncor Energy said "it is assessing the impact" of the curtailment, although the company "believes the market is the most effective means to balance supply and demand and normalize differentials."

"Less-economic production was being curtailed and differentials were narrowing as a result of market forces," Suncor added in a statement.

Reaction from the oil trading community was strongly negative.

"This is crazy," the US crude trader said. "A civilized government thinks it's OPEC." The decision will not "bode well for future investment in Alberta," the trader added.

A second trader said the government should not be able to tell the private sector to cut production, despite record-low prices.

"If they think they need to keep producing and basis would trade minus $75/b then so be it; government involvement is not the way to go," the second trader said.

ALBERTA SEES CUTS AS 'SHORT TERM'

"This is a short-term measure," Notley said during a webcast press conference.

In the long term, Notley said she will focus on getting new pipelines built and buying rail cars to move more crude out of Alberta. Those new rail cars will start coming on line next year, she said.

The 325,000 b/d, or 8.7%, crude production cut will be spread out between all producers until the current glut is cleared, which Notley expects will take three months. The production curtailment will then be reduced to about 95,000 b/d through the rest of 2019, according to a press release.

Company level reductions will be based off the company's "highest six months of production over the past year," the release said, and will apply to "both oil sands and conventional oil."

The volume of the cut will be reviewed every month to determine what is needed, she said.

The first 10,000 barrels of production from each operator are exempt, and producers that have already voluntarily reduced production "will be taken into account," the release said.

Some Canadian producers, including Canadian Natural Resources, MEG Energy and Cenovus Energy, earlier in November announced production reductions.

"Producers that are integrated with refining operations will still be able to access the oil supply required to meet their refining needs," the release said.

Some producers, such as Husky and Imperial, have used their integrated refineries to deal with the deep price discounts, with high refinery margins helping to balance out the low price of crude.

Notley said last week she submitted a proposal to Canada's Prime Minister Justin Trudeau asking the federal government to join Alberta in buying unit trains and up to 7,000 cars to move additional crude out of Alberta.

Notley said Alberta is already in negotiations with a third party to buy the rail cars, and anticipates a deal to get done in weeks. The first cars are expected to come into service in late 2019, with the "full complement" available in 2020, according to a press release.

The additional cars will eventually be able to move 120,000 b/d of crude, Notley said. The new rail cars would add to already record-high crude-by-rail shipments out of Canada.

Canada's crude-by-rail exports averaged a record 269,829 b/d in September, up 40,285 b/d from August, according to the latest figures from the country's National Energy Board.

Prior to Sunday's announcement, S&P Global Platts Analytics expected that crude-by-rail exports will need to average more than 300,000 b/d during the winter for the market to clear.

NEW PIPELINE CAPACITY STILL NEEDED

Western Canadian crude prices hit record lows for differentials, outright values and their price relative to the North American benchmark, WTI. WCS at Hardisty was assessed at an outright price of $14/b November 14, well below breakeven costs, which Platts Analytics estimates at roughly $42/b for new projects.

With Canadian oil production rising, new pipeline capacity will be needed in the long term to keep prices from sinking.

The latest Canadian Association of Petroleum Producers forecast shows Western Canadian production rising from an estimated 4.54 million b/d in 2018 to 5.2 million b/d in 2023 and 6.2 million b/d in 2035.

Enbridge's 370,000 b/d Line 3 expansion is expected to be in service by the second half of 2019, which will relieve some of the bottlenecks. Other major pipeline projects have been delayed or canceled.

The federal government agreed to buy the existing 300,000 b/d Trans Mountain pipeline and 590,000 b/d expansion project earlier this year. Trans Mountain ships Canadian crude to the Pacific Northwest, where it can be exported. But a federal appeals court in August delayed the expansion by ruling that the government did not adequately consult First Nations or consider environmental impacts from increased marine traffic.

A federal judge in Montana halted construction of TransCanada's 830,000 b/d Keystone XL pipeline pending another environmental review by the State Department. The State Department Friday announced it was moving forward with an Environmental Impact Statement on the project.

TransCanada estimates that XL will not be operational until two to three years after the start of construction.

According to press reports, New Brunswick's new premier, Blaine Higgs, is pushing to revive the Energy East pipeline, which would have transported 1.1 million b/d of crude from Alberta to Eastern Canada for local refinery consumption and for export.

But reviving the pipeline would require getting TransCanada on board. The company withdrew its application for the project in October 2017.

--Jeff Mower, jeff.mower@spglobal.com

--John-Laurent Tronche, john-laurent.tronche@spglobal.com

--Laura Huchzermeyer, laura.huchzermeyer@spglobal.com

--Edited by Valarie Jackson, valarie.jackson@spglobal.com