Skip to main content

A Canadian Natural Resources pump jack.

TODD KOROL/REUTERS

The dramatic fall in the value of Canadian oil has prompted a critical question for companies that stand to lose substantial revenues from their now-cheap products: how long will the pain last?

It's a question with serious consequences, given the 1.5 million barrels per day of Canadian heavy crude that, on Thursday, were selling $33.50 (U.S.) a barrel below the continent's benchmark prices, according to Net Energy Inc., the Calgary firm that tracks trading activity.

And it's an especially serious question for Canadian Natural Resources Ltd., the country's largest producer of that now deeply discounted heavy crude. On Thursday, in a week that saw several research reports suggesting current discount pricing could last past 2013 due to oversupply, the company offered a baldly different prediction. Canadian crude prices, president Steve Laut said Thursday, will bounce back by summer.

Story continues below advertisement

The dramatically different views of the future come amid a period of huge uncertainty for the oil patch, which is facing major shifts in oil production that are, in very short order, shaking up decades of established practice. Fast growth in the oil sands, along with the rapid production of big crude volumes from plays like the Bakken formation, are bringing on so much new oil that industry is scrambling to keep up.

For Canada, the particular concern is how those shifts are affecting the price of this country's most important export product. So far this year, Canadian oil has sold at near record-setting lows relative to West Texas intermediate, the heavily traded blend of crude that other oils, including Canadian products, derive pricing from.

In a CIBC World Markets Inc. report published this week, analyst Andrew Potter concludes that Canadian crude "could still face some discounting until 2014," amid a breathtaking increase in oil production. He calculates that the oil sands and the Bakken will add another 650,000 barrels per day over the next year-and-a-half, at a time when markets are already oversupplied. This is, he concluded, largely uncharted territory for the oil patch.

Mr. Potter pointed to CNRL, Baytex Energy Corp. and MEG Energy Corp. as the three heavy oil producers with the most to lose in the current environment.

CNRL, however, has offered a much more optimistic view. In a fourth-quarter earnings call, Mr. Laut argued it's a temporary phenomenon easily explained. He pointed to more than 350,000 barrels a day of heavy oil refining outages planned for the Midwest and West Coast in April and May.

"With 350,000 barrels per day out of service in the short term, it's pretty easy to see why heavy oil differentials have widened out in the short term," he said. "It's also clear they will return to previous levels once refineries have come back on."

The company on Thursday posted a record-breaking fourth quarter of 2011 that saw it pump over 657,000 barrels of oil equivalent per day. Its $2.16-billion in cash flow, also a record, was up 31 per cent over the same period in 2010, while earnings rose 66 per cent to $972-million.

Story continues below advertisement

In his report, Mr. Potter says refining outages are not to blame for the current disconnect, pointing instead to the flush of supply into the U.S. Midwest, where most Canadian and Bakken crude is destined. And the CNRL prediction falls at odds with the market's bets. The average for Canadian heavy oil futures over the remainder of 2012 is $30.06 below the WTI benchmark.

But forecasting, especially in a time of so much upheaval, is difficult.

Another report published this week, by analysts at Wood Mackenzie, suggests U.S. oil imports will fall by 3.3 million barrels a day by 2030, a one-third drop. An extra 1.5 million barrels a day could come by 2015 alone from light, tight oil plays like the Bakken.

Together with declining demand, that shakeup in production will "allow the U.S. to substantially reduce its dependence on foreign energy – and could force foreign energy exporters to seek new markets," James Brick, the firm's macro energy analyst wrote in the report.

This will, he concluded, "have untold consequences on an increasingly global energy market."

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies