Will Canada's Extended Oil Cut Plan Boost The Energy Sector?
Zacks Investment Research | Aug 21, 2019 01:46AM ET
Although Canada boasts vast endowments of oil and gas reserves, the country’s energy sector has been bearing the brunt of inefficient regulations and pipeline crisis. The 2014-2016 oil industry downturn and U.S. shale revolution hit the sector hard.
Supply glut and pipeline pinch widened WTI-WCS differentials to record levels last year, prompting the Alberta government to impose production cut mandates in December to remove 325,000 barrels of oil production per day from the market, beginning in 2019. The policy to ease the oversupply situation was supposed to end this year.
However, with pipeline crisis not likely to resolve anytime soon, the oil curtailment program has been extended through 2020-end. Nonetheless, the province has been easing its limits since January 2019, wherein an initial production cap of 3.56 million barrels per day (MMbpd) was recorded. Notably, September and October levels are set at 3.76 and 3.79 MMbpd, respectively.
To sum up, there is inadequate pipeline takeaway capacity for Canada’s upstream sector. There is hardly any pipeline space to transport the barrels of Alberta heavy crude to U.S. refineries along the Gulf Coast region. As it is, Canadian heavy crude is inferior to the higher-quality oil extracted from shale formations in the United States and is also more expensive to transport and refine.
Pipeline Pinch & Inefficient Regulations to be Blamed
Lack of takeaway capacity has been a major headwind for the Canadian oil industry. Pipeline construction in Canada has failed to keep pace with rising domestic oil, in turn forcing producers to sell their products at a discounted rate. Canadian players like Suncor Energy (NYSE:SU) and Cenovus Energy Inc. (TSX:CVE) , among a few others, bore the brunt of declining oil prices in the latest quarterly release. Both Suncor and Cenovus carry a Zacks Rank #3 (Hold). You can see Zacks Investment Research
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