Oil is pretty much the only leg junior and intermediate Canadian producers have to stand on right now for generating cash flow.
Natural gas prices remain subdued because of oversupply; the normal winter we got this year was not enough to eat into the inventory. NG supplies currently stand at 8% below last year’s level and 16% higher than the 5 year average. In my opinion it’ll be great if Canadian NG prices average $3.00/mcf this year.
Pipeline capacity and refinery demand is really what’s moving price differentials for both WTI and WCS. We need more pipelines to unclog Cushing, a major oil terminal in the midwest. And relief is on the way, in its last bulletin the US Energy Information Administration summed up the Cushing bottleneck providing upcoming solutions:
“Over the past three years, 815,000 bbl/d of new pipeline capacity delivering crude oil to Cushing was added. Over the same period, only 400,000 bbl/d of new pipeline take-away capacity was added. During the next two years an additional 1,190,000 bbl/d of pipeline capacity for delivering crude oil from Canada and the midcontinent to Cushing is planned, but this is balanced by 1,150,000 bbl/d of planned pipeline capacity additions to deliver crude oil from Cushing to the Gulf Coast. In addition, about 830,000 bbl/d of new pipeline capacity is planned to move crude oil directly from the Permian Basin to the Gulf Coast, avoiding the congested Midwest. If this capacity is constructed and fully utilized, waterborne imports to the U.S. Gulf Coast, particularly of light sweet crude oil, could drop significantly.”
US oil production is growing quickly but so is our production. We currently export 99% of our production to the US. So unless the US allows for exporting oil, the bottleneck may well move from Cushing to the Gulf Coast within a very short period of time. The refinery complex can only take up so much oil before discounts move south from WTI to LLS leaving Canada with the same end result we see today.
Let’s not kid ourselves here, even if Keystone XL gets approved, Canada still needs to look east and west to diversify its markets. Heading east, we get access to eastern refineries and wean out foreign oil imports. Going west, we would start exporting to Asia if we get to build a pipeline into BC one day. This is how we can avoid going through the price differentials headache a second time this decade…
Have a Great Weekend!