Canadian Crude Weakness Returns After Alberta Eases Output Limits

(Bloomberg) -- Alberta’s loosening of crude-production limits has renewed risks of a price collapse similar to the one experienced in 2018.

Oil sands benchmark Western Canadian Select is trading near the weakest discount to West Texas Intermediate in more than a month, data compiled by Bloomberg show. At the same time, the discount for Edmonton Mixed Sweet crude, a benchmark for Canada’s conventional producers and shale frackers, grew to the widest in more than a year.

Those differentials suggest that Canadian oil is at high risk of a “blowout,” according to a report by Credit Suisse analyst Manav Gupta.

Alberta’s government has loosened output limits imposed at the start of 2019 to counter a glut caused by a lack of pipeline capacity and too much oil production. Before the cuts, Western Canadian Select’s discount to WTI has grown as wide as $50 a barrel.

With those limits winding down, production is on the rise, prompting increased rationing on Enbridge Inc.’s heavy oil line in December and January. A temporary shutdown of a major export pipeline and a rail strike in November contributed to record-high inventories in Western Canadian that month, according to Genscape data.

Should Western Canadian Select’s discount to WTI widen to more than $25 a barrel, the “Alberta government might be forced to step back in and raise the volumes on mandated cuts to control a bloating inventory situation,” Gupta said. A “wider WCS spread is a near-term tailwind.”

To contact the reporter on this story: Robert Tuttle in Calgary at rtuttle@bloomberg.net

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Catherine Traywick, Christine Buurma

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