Oil markets could be in for 'super glut,' but Canada's new pipeline access offers shelter from storm

As North American oil prices remain in the basement — coming close to a five-year low this week — analysts say Canada’s increased pipeline capacity puts the country in a better position to handle the turmoil.

“We have sufficient pipeline capacity such that we have much narrower or lower (discounts) for our crude,” Rory Johnston, founder of Commodity Context, said in an interview.

It means that Canada ships its oil to market much more economically than it did before and can bear the impact of lower global prices. The oilpatch can still make money on a barrel of oil even with diminished prices.

Since the Organization of Petroleum Exporting Countries (OPEC) started releasing more oil into global markets this year, prices have steadily fallen.

Since July 29, North American oil has been stuck below US$70 per barrel and even dropped to $55.06 on Tuesday — a nearly five-year low. Prices recovered slightly to just shy of US$56 a barrel on Wednesday.

Johnston said the oilpatch is in a much better position compared to 2018 when there was a similar drop in oil prices that hit the energy sector hard.

“We had prices crashing through essentially to Boxing Day, and that was around the same time that Canadian Western Canadian Select (discounts) blew to their all-time high,” Johnston said.

With prices so low, Canadian companies had to pull back on production because it was costing them too much to ship their oil, and the returns didn’t support it.

“The pain was caused by our own lack of doing, if you will, of lack of pipeline construction,” Johnston said.

Now, with the expanded Trans Mountain pipeline in operation, Canadian oil can hit the market much faster and at a fraction of the cost. The savings may come in handy for what could be a bleak new year for oil prices.

Jeremy McCrea, managing director of equity research with BMO Capital Markets, said what’s coming is either a glut or a “super glut.” Either way, the concern remains that there’s a lot of supply building in global markets that’s putting pressure on prices.

“It’s hard to grasp how severe this oil glut is looking to be, but I think for the most part, it is a well-known that there is some concern about how much inventory is starting to build here onshore,” McCrea said.

Whether it’s the known impacts of increased supply coming from OPEC, the “resiliency” in the United States’ shale production, or unknown risks on the geopolitical stage, the future of oil prices in 2026 remains unclear.

Johnston said massive stocks of sanctioned oil from countries like Venezuela and Russia are sitting on ships offshore. Once those vessels arrive at their destinations, he said, prices could fall even lower.

“I think the base case, as we continue to see that surplus gets dumped onshore, onto visible commercial storage, that’s going to kind of finally kick the legs out from under pricing,” Johnston said.

He said another scenario that could play out is that countries like Venezuela could curb production in the face of sanctions from Western countries, helping to bring supplies back down.

McCrea framed the situation as a sort of global standoff.

“We see the amount of oil that’s being proposed that’s going to come on. Producers see this. OPEC sees this, and no one is blinking quite yet. And this is why oil prices continue to drop,” McCrea said.

There’s no clear sign yet of who might blink, but Johnston said it would take markets most of next year to chew through the excess supply of oil and, with prices so low, producers would lose a significant amount of their revenue in the process. He doubts OPEC’s willingness to withstand the losses.

“I don’t think that OPEC is going to be comfortable with prices that low for that long, for their own budgets and their own economies,” Johnston said.

In the meantime, while oil producers lose out, Canadians may appreciate a holiday treat of some more reprieve at the gas pump.

zdelaney@postmedia.com

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zdelaney@postmedia.com

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