The oil-sands glut is going to get worse.
Significant manufacturers face a darkening outlook for the year ahead as a flood of new generation swamps markets, overpowering space on pipelines, according to a new report by Royal Bank of Canada.
The surge reflects a collection of big-ticket investments made before international oil prices crashed in 2014, led by Suncor Energy Inc.’s $17-billion Fort Hills mine and Canadian Natural Resources Ltd.’s expanding Horizon complicated.
It points to a period of sustained price weakness for benchmark Western pick, with consequences for corporate earnings and provincial government financing that rely on power exemptions to finance spending on education and health care.
For weeks, increasing supplies of the extra-thick oil have backed up in Alberta due to restricted flows on key pipelines that send the majority of the state’s oil to refineries in america, sending prices to multiyear lows.
A number of that pressure should lift as short-term limitations facilitate on TransCanada Corp.’s Keystone pipeline and Enbridge Inc.’s mainline conduit.
But prices are expected to turn sharply lower again next year with no new export capability as more primitive flows on trains, the bank says.
Oil sands producers are poised to pump another 315,000 barrels per day of supplies to the market next year, followed by 180,000 barrels per day in 2019. That follows expansion of 250,000 barrels per day this year, according to information compiled from the lender. Complete oil sands production is forecast to jump to 3.3 million barrels per day by 2021.
“According to our investigation, Western Canada’s oil exports are set to materially exceed export pipeline capacity from the first quarter of 2018,” analysts headed by Greg Pardy stated in the report.
Barrels of the heavy crude changed hands for approximately $33.02 (U.S.) in midday trading on Friday, about $24.30 less than the headline North American oil cost, according to agent Net Energy Inc..
RBC forecasts the essential price gap will tighten in 2018 to about $15.50 per barrel, before widening again to $17.50 in 2019. But even small movements in the spread, called the differential, can have large impacts on corporate cash flows.
Shares of companies with manufacturing heavily skewed toward bitumen dropped sharply in Friday’s session on the Toronto Stock Exchange, on a day that saw U.S. West Texas intermediate climb.
Big winners were Cenovus Energy Inc. (down 3.55 percent), MEG Energy Corp. (down 5.43 percent) and Baytex Energy Corp. (down 4.53 percent).
While each has fostered financial hedges this season in an attempt to offset impacts from poorer prices, they’re seen as especially exposed to a widening spread between WCS and the U.S. benchmark cost.
Truly, a 3 (Canadian) rise in the purchase price gap equates to a 26-per-cent decrease in MEG’s cash flow, according to RBC, compared with a 1-per-cent effect for Suncor, whose refining operations function as a buffer against large swings.
The industry argues it requires more pipelines to bring better prices, but Kinder Morgan Canada Ltd.’s Trans Mountain expansion into the West Coast and TransCanada’s Keystone XL are years from being constructed.
For the time being, storage levels have grown and manufacturers have turned to railroad, a pricier mode of transportation that adopts already thin margins.
Shipments increased to an average of 87,000 barrels each day in November, up from a typical 50,000 barrels per day in July, according to data company Genscape Inc..