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Alberta's oil cuts could hit light oil producers, rail shipments

Reuters  |  VANCOUVER 

By Julie Gordon

VANCOUVER (Reuters) - Alberta's decision to mandate output cuts to reduce a supply glut will have negative effects on North American producers of used for blending and U.S. refiners importing crude via rail, even as several major companies cheered the move.

Canada's production is at a record 4.6 million barrels a day, but producers cannot get to market because the pipelines that cross into the are full. Pipeline construction, particularly in Canada, has not kept up with record output.

Shippers and refiners are moving discounted barrels of oil via rail or trucks, but the storage glut sits at more than 35 million barrels in Alberta, just below all-time records set in September, according to data firm

have been sagging, with U.S. crude recently dipping to near $50 a barrel on renewed oversupply fears. Canadian producers have been hit even harder because of the hefty discount.

on Sunday ordered producers to cut output by 8.7 percent, or 325,000 barrels a day (bpd), starting in January. That boosted Canadian crude prices and shares of major producers, but has had negative effects elsewhere.

Demand for condensate, a very blended with crude so it will flow through pipes, is expected to fall as producers cut heavy output, analysts say. A narrowed discount for Canadian crude prices makes rail shipments to the less economic for refiners.

Stronger per-barrel pricing will help Canadian companies increase capital spending in preparation for 2020, when more export capacity is set to come online.

"With the government stepping in the way they did, companies are going to be far more inclined to have significant capital programs in 2019 so they can be ready to move that oil in 2020," said Alex Pourbaix, of Canada's third largest oil producer,

RAIL ECONOMICS

is the United States's top supplier of crude, sending more than 3.3 million barrels south daily, according to the Board. U.S. refiners have turned to rail to ship incremental crude barrels to the U.S. to take advantage of discounted prices.

But Sunday's cuts raised the price of Canadian crude, with the discount on Western Canadian Select (WCS) narrowing to as little as $19.50 below the West Intermediate (WTI) benchmark on Monday, below October's record $52 discount.

It costs about $22 to ship crude via rail from to the Gulf, market sources told

"Unless the rail guys offer massive discounts in freight, it's not economical to lock in rail volumes," said one

shipped nearly 270,000 bpd of oil by rail to the in September, according to the National Energy Board, half of which went to refiners. Texas-based Valero averaged about 30,000 bpd of Canadian crude by rail in the third quarter, it said.

CONDENSATE COULD SUFFER

Share prices of Canadian companies that drill condensate, a used for blending with heavy Canadian crude, hit multiyear lows on Tuesday, as demand is likely to fall as a result of the cuts, said in a note.

Canadian condensate demand is about 650,000 barrels a day, of which 350,000 bpd is produced domestically with the rest imported from the Analysts said cuts could reduce demand by up to 70,000 bpd.

One played down the effect, arguing condensate imports would likely be dropped first.

"The pipes will continue to need condensate for the bitumen," said Alan Boras, at

Shares of Seven Generations hit a record low of C$9.56 in on Tuesday, while rival condensate producers and hit lows not seen since 2016.

(Reporting By Julie Gordon; additional reporting by and Jessica Resnick Ault; editing by Jonathan Oatis)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Wed, December 05 2018. 20:57 IST
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