Oil sands producers ‘on the edge’ with big discount to WTI

Major shutdown at refinery that processes Canadian oil sands crude, pipeline disruptions weighing on industry

The price of oil hit a six-year low Wednesday as U.S. stockpiles posted an unexpected increase, bringing further pain to Canadian oil sands producers.

oil sands

Photo: Suncor Energy.

The price of West Texas Intermediate, the North American oil benchmark, went as low as US$40.40 in intraday trading after a U.S. Energy Information Agency report showed a 2.6-million-barrel increase in American crude oil inventories.

In a research note, Desjardins Capital Markets said the analyst consensus called for a 400,000 barrel drop in inventories.

The EIA also revised downward its price outlook for oil by US$6 a barrel for 2015 and US$8 a barrel for 2016 compared with last month’s forecast. The agency now sees an average of US$49 a barrel for 2015 and US$54 a barrel in 2016.

“There’s a lot of worry right now about the overproduction and storage concerns as we come off of summer driving season,” said Martin Pelletier, portfolio manager at TriVest Wealth Counsel Ltd.

oil sands

Photo courtesy Tar Sands Solutions Network.

In a research note Wednesday, Citigroup said that with oil balances pointing to further oversupply this year, a drop to the 2008 low of US$32.40 a barrel is a “conceivable reality.”

The drop in oil prices comes as Canadian oil sands producers struggle with a high discount to the U.S. benchmark after a major shutdown at a refinery that processes Canadian heavy oil as well as pipeline disruptions.

“As a result, the Canadian oil producers have just been hammered over the last couple of weeks,” said Pelletier.

A report Monday by JBC Energy said oil sands viability is “on the edge” in current markets, with producers on average seeing profits of no more than US$5 a barrel.

Despite the oversupply, Canadian oil sands producers have little choice but to keep producing, said Peter Argiris, an analyst at Wood Mackenzie in Calgary.

“The problem is, these companies just can’t stop producing. They still need to produce, they need to pay their bills, they need to ensure their bond covenants are not breached. So there’s a variety of reasons why companies need to produce.”

Pelletier said he doesn’t see oil sands companies shutting-in production because the large-scale projects rely on long-term outlooks, but the drop could spur acquisitions in the sector.

“With the sell-off in these companies it’s a lot cheaper simply to go and buy production,” said Pelletier.

“You can buy de-risked production for the same price as developing a new project, and that makes a lot more sense.”

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