The oil-sands glut is about to get worse.
Major producers face a darkening outlook for the year ahead as a flood of new production swamps markets, overwhelming space on pipelines, according to a new report by Royal Bank of Canada.
The surge reflects a series of big-ticket investments made before global oil prices crashed in 2014, led by Suncor Energy Inc.'s $17-billion Fort Hills mine and Canadian Natural Resources Ltd.'s expanding Horizon complex.
It points to a period of sustained price weakness for benchmark Western Canadian select, with implications for corporate revenues and provincial government finances that rely on energy royalties to fund spending on education and health care.
For weeks, rising supplies of the extra-thick oil have backed up in Alberta because of restricted flows on key pipelines that ship most of the province's oil to refineries in the United States, sending prices to multiyear lows.
Some of that pressure should lift as short-term constraints ease on TransCanada Corp.'s Keystone pipeline and Enbridge Inc.'s mainline conduit.
But prices are expected to turn sharply lower again early next year without new export capacity as more crude flows on trains, the bank says.
Oil sands producers are poised to pump another 315,000 barrels a day of supplies into the market next year, followed by 180,000 barrels a day in 2019. That follows growth of 250,000 barrels per day this year, according to data compiled by the bank. Total oil sands production is forecast to jump to 3.3 million barrels a day by 2021.
"Based on our analysis, Western Canada's oil exports are set to materially exceed export pipeline capacity in the first quarter of 2018," analysts led by Greg Pardy said in the report.
Barrels of the heavy crude changed hands for roughly $33.02 (U.S.) in midday trading on Friday, about $24.30 less than the headline North American oil price, according to broker Net Energy Inc.
RBC forecasts the key price gap will tighten in 2018 to around $15.50 per barrel, before widening again to $17.50 in 2019. But even little movements in the spread, known as the differential, can have big impacts on corporate cash flows.
Shares of companies with production heavily skewed toward bitumen fell sharply in Friday's session on the Toronto Stock Exchange, on a day that saw U.S. West Texas intermediate climb.
Big losers were Cenovus Energy Inc. (down 3.55 per cent), MEG Energy Corp. (down 5.43 per cent) and Baytex Energy Corp. (down 4.53 per cent).
While each has boosted financial hedges this year in a bid to offset impacts from weaker prices, they are seen as particularly exposed to a widening spread between WCS and the U.S. benchmark price.
Indeed, a $3 (Canadian) increase in the price gap translates to a 26-per-cent reduction in MEG's cash flow, according to RBC, compared with a 1-per-cent impact for Suncor, whose refining operations serve as a buffer against big swings.
The industry argues it needs more pipelines to fetch better prices, but Kinder Morgan Canada Ltd.'s Trans Mountain expansion to the West Coast and TransCanada's Keystone XL are years from being built.
For now, storage levels have increased and producers have turned to rail, a pricier mode of transport that eats into already thin margins.
Shipments increased to an average of 87,000 barrels per day in November, up from an average 50,000 barrels a day in July, according to data firm Genscape Inc.