Deloitte: Canadian oil prices likely to improve in 2019

11 January 2019 Consulting.ca

Prices for Canadian heavy and light oil should improve this year on the back of increased demand from US refineries, better transportation capacity, and mandatory Albertan production cuts. A report from Deloitte’s Resource Evaluation and Advisory group expects the three factors to alleviate the especially large differential between Canadian prices and the US benchmark WTI price.

Oil price volatility was a theme in 2018, with substantial fluctuation in global prices before softening in October over concerns about increased supply and minimal growth in demand. Amid an explosion in shale-fueled production in the West Texas Permian basin, WTI (West Texas Intermediate) prices fell due to massive growth in supply and lack of transport capacity. Meanwhile, overseas Brent crude prices outpaced WTI prices in Q4 2018, though they decreased amid higher international supply and Iran sanction exemptions granted to India and China.

December saw OPEC and non-OPEC countries agree to a decrease in output of 1.2 MMbbl/d, which should prop up Brent prices. The US’ continuing supply growth, however, will mean a continued discount WTI price versus Brent until additional transport and export infrastructure goes live.

Meanwhile, Canada suffered from a dire mismatch between production and export capacity in Q4 2018, leading to a collapse in Canadian oil price benchmarks. "Heavy oil differentials were as high as US$45 per barrel in mid-November while light oil differentials reached as much as US$35 per barrel,” related Andrew Botterill, Partner, Deloitte REA group.

Canadian pipeline/rail export capacity

Storage stockpile volumes reached 35 MMbbl in Alberta amid increased oil sands production and decreased demand due to refinery maintenance in Q4. According to the report, US Midwest refineries – where 70% of Canadian crude exported to the US is processed – had their utilization rates fall to 73% from a traditional 90%, leaving Canadian crude with nowhere to go but storage. Price differentials began to narrow slightly at the end of the year as these refineries went back online, however.

Addressing supply glut and low prices, the Alberta government implemented mandatory production cuts as of January 2019 to reduce volume by 325,000 bbl/d until excess storage volume disappears (pegged at somewhere in Q1), after which cuts would drop to 95,000 barrels a day for the rest of 2019.

The production cuts will principally affect the five big producers that account for 85% of Alberta oil production, since operations producing less than 10,000 barrels a day are exempt. Meanwhile producers in Saskatchewan, where there are no cuts, will benefit from the rising crude prices.

Deloitte expects the volume reductions to decrease the differential between Canadian and US benchmark prices, while increasing Alberta provincial royalty revenues. The back-in-action Midwest refineries will likewise help revive prices – with heavy and light Canadian already starting to rebound in early December.

The Alberta government has also purchased additional rail cars to increase rail export capacity by 120,000 bbl/d by 2020. Though the province would love to get the expanded capacity of the Trans Mountain pipeline capacity going (and its access to global, non-US markets), the rail cars will have to do for now as the pipeline remains stalled amid environmental and Indigenous consultations.

The completion of Enbridge’s Line 3 in late 2019 will also boost oil transportation, adding 370,000 bbl/d of export capacity to the US, for an estimated increase of 9% over current capacity. Deloitte expects the pipeline to play a major roles in relieving Albertan oversupply, while boosting prices heading into late 2019.

Downstream, the Sturgeon refinery was scheduled to process 80,000 bbl/d at the end of 2018; the refinery could alleviate pressure for expanded transport capacity by processing more domestically. Additionally, the US Gulf Coast will seek out more heavy oil from Canada as they continue to receive less from Mexico and Venezuela as production in those countries declines.

"Increased demand for Canadian oil from Alberta's Sturgeon refinery and from U.S. Gulf Coast refineries looking to replace some of their heavy crude supplies that used to come from Mexico and Venezuela is another reason we expect the price differential with WTI to continue narrowing in 2019 and beyond," said Botterill. "At this point, we are forecasting a price of US$58 per barrel for WTI this year and C$50 per barrel for WCS [Western Canadian Select]."


Profile

More news on

×