The cost of a barrel of Canadian oil soared to $44 in January. The reason was a sharp decline in production in Alberta. This may lead to a decrease in revenue for US exporters of Canadian oil.
The government of the Canadian province of Alberta forced manufacturers to cut production by almost 9% to raise collapsed prices for a local brand of Western Canadian Select (WSC) oil.
This led to the fact that the price of the WSC variety rose to $44.71 per barrel from $14 per barrel recorded in November, The Wall Street Journal reported. Thus, over the past month and a half, Canadian oil has risen in price by 40%.
At the end of last year, WCS traded at a historic discount to the American West Texas Intermediate (WTI) standard. In October 2018, WCS prices collapsed to $25.6 per barrel, and the difference between the prices for these varieties reached a record - more than $51 per barrel.
By Friday, January 11th the gap between WTI and WCS was reduced to less than $7, which was the lowest level since March 2009, calculated at RBC Capital Markets. The reduction in oil production paid off with rising prices.
Over the past 10 years, Canadian oil has on average cost about $17 dollars cheaper than WTI. The reason is that the price is pricked for its transportation from a field in the province of Alberta to refineries in the United States. In addition, processing Western Canada Select into more expensive fuels is more expensive than American WTI or North Sea Brent.
Why the price increased?
Canadian oil has rebounded on expectations that production cuts will help reduce crude stocks. Starting from January 1st, 2019 Canadian manufacturers reduced production by 325 thousand barrels per day, and this reduction will last one year.
In addition, the price of Canadian oil rose with the growth of Brent and WTI. Oil prices rose after Russia announced that it would extend the agreement with Saudi Arabia to stabilize oil markets, which gives hope that OPEC and its allies will reduce production and stabilize the market.
But some analysts believe that government production restrictions, which expire at the end of the year, will be only a temporary solution to Canada’s problems, and the risk of a new price drop remains.
Canada is the fourth largest oil producer in the world. According to the government, oil accounts for almost 11% of the country's nominal GDP. According to the International Energy Agency, production in Canada in August 2018 rose to a record 5.3 million barrels per day.
The country produces much more fuel than it consumes, although only about a quarter of the oil produced is processed. Most Canadian oil goes south to the United States, where there are refineries that can process heavy Canadian oil.
The actions of the Alberta government has become an extraordinary intervention in the market. Canada’s Constitution gives the provinces broad powers to regulate natural resources, including production levels. The last time the province took such a step in 1981.
Major oil producers in the province, including Suncor Energy and Exxon Mobil, have criticized the provincial government for unwarranted interference with free markets. A spokesman for Imperial Oil said the company did not agree with the mandatory reduction in production.
Canada’s weak infrastructure has had a negative impact on the energy industry over the past year. Oil reserves in the country rose last year due to a shortage of pipelines needed to transport oil from Alberta, which has no access to the sea, to American refineries. This left manufacturers with few options for selling oil, which affected prices. In addition, in September in the United States began the season of preventive maintenance and modernization of the refinery, which led to a decrease in demand for Canadian oil.
Oil reserves in Canada grew by the end of last year, but research firm Genscape said that reserves in Western Canada for the week ending January 11 fell by 2.5 million barrels, suggesting that production cuts really work.