Pressure has eased on a persistent choke-point for Canadian oil after companies throttled back production due to COVID-19. The historic cuts have left normally congested pipelines with room to spare, buying time as the sector holds its breath for much-delayed new projects to come online.
Canada’s oil sector collectively shut in about a million barrels of daily crude output after the coronavirus erased global demand and sent prices plunging to historic lows in the spring. Alberta’s oil production fell by almost 25 per cent, according to provincial estimates.
“You now have so much slack in the system because of these barrels that have been cut back,” Rory Johnston, market economist and managing director at Price Street, told Yahoo Finance Canada. “It’s bought the entire midstream sector time to accommodate whatever comes next.”
While the North American benchmark price has settled in the US$40 range for several weeks, and fuel demand is showing signs of recovery, the chief executives of several major Canadian oil firms signalled a cautious approach to ramping up production as they reported their latest financial results.
According to a Bloomberg estimate in July, about 20 per cent of shut-in production is being restored. Johnston said even if 700,000 barrels per day were brought back online by year’s end, the current pipeline system and rail offtake could accommodate the increase.
Canadian heavy crude trades at a discount to the West Texas Intermediate benchmark price. The fall from packed pipelines and record rail shipments in February narrowed that spread to about US$4 per barrel in May, from over US$20 at the beginning of the year. Under normal circumstances, that would have been cause for celebration among for Canadian producers.
“In this instance, the good news was actually evidence of very bad news. The only reason you got a differential that low is because people just stopped producing it,” Johnston said.
“It’s at about US$10 to $US11 bucks per barrel right now. That wider differential is your ironic good news signal. It’s the flip-side now. Historically, a wider differential was bad for Alberta. Now, a wider differential is evidence that production is starting to come back into the system.”
Like so much in the era of COVID-19, it’s unclear how long the window of excess pipeline capacity will last. It’s a race between refinery demand spurring more production and resuming pre-pandemic pressure on existing pipelines, Enbridge’s (ENB.TO)(ENB) Line 3 replacement, TC Energy’s (TRP.TO)(TRP) Keystone XL, or the federal government's Trans Mountain expansion, providing relief.
“We always see things come out of the woodwork and gum up those timelines,” Johnston said. “Those are the same three pipelines I've been talking about for half a decade, and they're always gonna come around the corner next year.”
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.