Lower global benchmark prices will likely weigh on Alberta oil sands producers' third quarter earnings reports out this week, but expanded pipeline capacity is poised to set this coming winter apart from others.
Volatile price swings have historically been a hallmark of Alberta's oil market because of pipeline congestion and subsequent spikes in inventory levels. Canada's 590,000 b/d Trans Mountain Expansion (TMX) has helped to mitigate that since it began drawing crude from Alberta during the second quarter, but global benchmark prices have likely kept oil sands netbacks lower in recent months, despite the added flows.
Crude production in Alberta has been on the rise in 2024, averaging 4.03mn b/d in July and August, up by 3.4pc from those same two months in 2023, according to the latest figures from the Alberta Energy Regulator (AER).The added production may help offset a recent drop in Nymex WTI benchmark prices that pushed the outright price of Canada's heavy sour benchmark to about $60/bl across the third quarter, down from $69/bl a year earlier.
The higher prices in 2023 contributed to a combined profit of C$7.4bn ($5.4bn) for Canada's four largest oil sands companies — Canadian Natural Resources, Cenovus, Suncor and Imperial Oil — in the third quarter last year while pumping out 3.4mn b/d, on average. The odds of repeating those results when companies start reporting on 31 October may be a challenge given sagging global prices. But a domestic market now underpinned by ample export capacity through TMX has given producers more options to place their volumes than before.
Winter Wonderland
The differential for Western Canadian Select (WCS) at Hardisty, Alberta, was relatively steady during the third quarter, trading at a $13.50/bl discount to the light sweet benchmark at Cushing, Oklahoma, only 75¢/bl weaker than the third quarter 2023.
But so far during the fourth quarter, the differential has refused to slide to a deeper discount, instead making notable gains from last year as traders embark on final trade cycle of 2024. WCS for October and November averaged a $12.75/bl discount while December is currently pegged even tighter, at $12/bl, with the window set to open later this week. This compares to an average discount of $22/bl in the fourth quarter 2023, including a differential that deepened to beyond $26/bl in December of that year, and a December 2022 discount near $30/bl.
The recent pricing is further evidence that the expanded TMX system is having the intended effect at a time when strong production and higher diluent requirements typically cause a pinch point getting onto export lines.
TMX roughly tripled the capacity to Canada's west coast to 890,000 b/d when it was placed into service on 1 May. That same day, Cenovus' chief executive Jon McKenzie said he expected the light-heavy differentials to remain narrow "for years" as a result of the added egress.
Trans Mountain's projections show the system will likely be full by 2028, a testament to how useful the line is, according to chief executive Mark Maki earlier this month in front of a federal Natural Resources committee in Ottawa.
Fellow midstream company Enbridge in the second quarter of this year still shipped 3.08mn b/d of crude on its massive 3.1mn b/d Mainline export system to the US Midcontinent and beyond, despite competing TMX being placed into service. Enbridge is looking to expand its system by about 150,000 b/d in late-2026/early-2027 to provide yet another tranche of breathing room for producers that have upstream expansion plans of their own.
Canadian crude flows to the US Midcontinent were still intact in the early parts of the third quarter, according to data from the US Energy Information Administration (EIA).
Cenovus and Canadian Natural Resources report their third quarter results on 31 October, followed by Imperial Oil and Enbridge on 1 November. Suncor reports on 12 November.
