Alberta's OPEC-style cuts draw down oil backlog, analysis firm says

Concerns with the fallout from Alberta's OPEC-style cuts may persist, but anenergy data analysis firm says the mandatory oil curtailment appears tobe drawing down crude inventories.

The province this month imposed an 8.7-per-cent oil-production cuton industry, or roughly 325,000 barrels a day, in order to clear a huge backlog of crude that was punishing Alberta oilprices.

Government officialshaven't released statistical updates on the effectiveness of thestrategy, buta senioroil analyst at GenscapeInc. said its research indicatesthe curtailment is working as intended so far.

"We are seeing it through January 19th roughly in line with what the government hasstated as theirgoals to draw down inventories," Mike Walls said in an interview.

"For the most part, we saw significant builds [in inventories] basically throughout 2018, and now we are starting to see draws. So I can say that they are having an impact already."

On Twitter Friday, Genscapesaid inventories in Western Canada fell 603,000 barrelsto 34 millionbarrels for the week endingJan. 18, pointing to it as "further evidence that Alberta production cuts continue to impact the market."

The privately held U.S.-based firm uses both public data and proprietary research to gather information for clients on storage hubs, pipeline flows and crude-by-rail shipments in Western Canada.

The province did not confirm Genscape's figures. The government gets itsdata from a third party and the information isnot publicly available.

"We're currently reviewing how much has been drawndown from all storage levels across Alberta," government spokespersonMike McKinnonsaid in an email. "More information, including the next steps, will be available soon."

Alberta is matching its production levels toits estimated export capacity,while also encouraging a drawdown in storage levels. For January and February, this production limit is 3.6 million barrels a day of raw crude and bitumen, which is slightly lower than the province'sestimated export capacity.

Premier Rachel Notley has pointed to the narrowing gap between Canadian and American benchmark oil pricesas evidenceof theeffectiveness of the government's strategy.

On Friday, the difference was under $10 US a barrel. In the fall, it had spiked to over $50.

Energy economist Peter Tertzakian, executive director of the ARC Energy Research Institute, said he believes the policy isworking and that the price is a good gauge.

"The differential has rebounded," saidTertzakian.

"I'm optimistic we're through the worst of it and hopefully we won't needgovernment intervention in the future. But the extraordinary action that they took at that time was appropriate.

"We were facing catastrophic layoffs had the situation gone on for several more weeks. I believe that was averted. Now, the situation is still not healthy, but I believe the government prevented something far worse from happening."

Alberta announced in early December that it would temporarily impose production cuts on the industry in 2019.

The decision followed calls from some oil companyCEOsand United Conservative PartyLeader Jason Kenney for the province to enact a mandatory curtailment to bolster prices, improve cash flow and stem job losses.

But opponents of the policy including Suncor, Husky Energy and Imperial Oil said the market was working and that taking such a step could have implications for future investment in Alberta.

Conference Board of Canada chief economistPedroAntuneswrote this month thatintervening in industry production plans "could hurt the province's attractiveness for future investment over the long term."

Buthe also said the near-term solution "will likely be effective in shoring up prices and heading off a decline in royalties and a larger pullback in activity in the oilfield services sector."

Industry and government will also be mindful of any significant interruptionto rail or pipeline movement, which could have majorimpacts on the effortto reduce the oil glutif they occurred.

Kevin Birn,anoilsandsanalyst with IHSMarkit, said Alberta'scurtailment policy is probably somethingthat's going to be judged over a longer period of time.

"Yes, differentials have narrowed and that's a positive metric because the prices we saw prior to Christmas were unsustainable," Birn said. "But curtailment needs to be measured over a longer period of time."