Wildfires, shutdowns fail to ignite oil markets

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The energy sector may have dodged a bullet.

If all those oil sands plants around Fort McMurray had been forced off line by a massive inferno two or three years ago, global energy markets would have gone haywire.

Crude was then about $100 (U.S.) a barrel and a million barrels a day off line for more than a week would have raised the spectre of shortages, especially when – as is the case now – Nigerian oil output has also dwindled.

But with U.S. crude at less than $45 after 18 months of downturn due to a worldwide oversupply, the market impact has been relatively contained. Alberta Premier Rachel Notley and several oil sands executives met on Tuesday and reported that major plants are on the road to restart.

There could still be complications for energy markets.

The wild card in the equation is time. Traders, who do the deals that result in all of that bitumen and synthetic oil from northern Alberta flowing to refineries in Illinois, Indiana, Texas and Ontario, worry most about potential snags that could add to delays.

It could happen in many places along the chain. Oil sands plants could suffer operational problems while being powered back up after getting shut down cold. Electricity and pipeline companies could find serious damage to their systems and facilities as a result of the wildfires that have caused what is expected to be Canada's costliest disaster.

So far, though, the market has taken it largely in stride.

Check it out: U.S. benchmark West Texas intermediate (WTI) fetched $44.78 a barrel on May 2, just before the fire crossed into Fort McMurray, and has since settled back to $44.66.

Canadian crude has climbed, but not to an outrageous level that would suggest a supply crisis. June delivery Western Canada Select, a mix of bitumen from the oil sands and heavy crude oil, sold for $13.60 a barrel less than WTI on May 2. The discount improved to $12.43 by Tuesday, according to oil broker Net Energy Inc. It had been narrower over the past week.

Light synthetic blend, the upgraded oil sands crude produced by Syncrude Canada and Suncor, was on par with WTI at the start of the month. It sold for a 60-cent premium on Tuesday. It too had been higher in recent days.

The tempered pricing reflects optimism that the most of the outages will be resolved relatively shortly.

It's a huge deal to U.S. refiners. As much as half of Canada's oil exports are shipped to eight refineries in the Midwest, many of which have undergone multibillion-dollar refits to accept more of the stuff.

Those refiners have been handed blanket letters of force majeure, a legal stipulation that frees a supplier from delivering on a contract due to events outside its control. The problem for the buyers is, they do not know yet how much of their supply for the month will actually arrive, one veteran trader said.

"Refiners are complaining, saying, 'Hey you've got to at least give me a percentage,'" the trader said. "They just don't know how short they are yet, so that's why you haven't seen the market react a ton."

Another factor keeping a lid on things has been record, or near-record, inventories at key oil storage locations including Edmonton, Hardisty, Alta., and Superior, Wis. However, with all of the production off line, those volumes are dwindling quickly, the trader said.

One pipeline, known as Capline, which runs to Midwest refineries from the U.S. Gulf Coast, will operate at double the usual volume to help compensate for any lost Canadian volumes, Reuters reported.

Late Tuesday, Ms. Notley and Suncor Energy chief executive officer Steve Williams provided the market some relief, saying no plants north of Fort McMurray – where most output was taken off line – were damaged. Some projects could be brought back on line as early as 24 hours once the go-ahead is given. Others will take longer, depending on how fully they were shut down last week.

South of the city, the extent of damage to steam-driven projects such as Nexen Energy's Long Lake venture is unknown with the wildfire still preventing access to those sites.

Alberta's oil customers will keep watching every twist and turn as production inches back up, even if the worst appears to be over. The fact that the blaze ignited at a time of abundance of oil in the world is one small mercy.