Fort McMurray wildfire cuts production by a million barrels a day and oil prices drop? - Action News
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Fort McMurray wildfire cuts production by a million barrels a day and oil prices drop?

It's been nearly a week now since Alberta's oil production began to slow as a result of the wildfire in Fort McMurray. More than a million barrels a day of oil production has been taken off the market, with very little reaction from markets.

Market confident, so far, that oilsands production will come back quickly

A member of Wildfire Management Alberta's Wild Mountain Unit out of Hinton, hoses down hot spots in the Parsons Creek area of Fort McMurray. (Chris Schwarz/Government of Alberta/Reuters)

It's been nearly a week sinceAlberta's oil production began to slow as a result of the wildfire in Fort McMurray. More than a million barrels a day has been taken off the market, with more being shut in on Monday, and there's no firm timeline for starting up.

So far, the oil market has largelyshrugged off the effects of the disaster on supply, confident that production will come back in relatively short order.

Analysts say that may begin to change, though, as the flow of oil to U.S. refineries starts to slow and oilsands operations try to figure out how to restart with many of their workers displaced.

Oil prices down

While there has been a small increase in the price of Western Canadianoil, the two major benchmarks, Brent and West Texas Intermediate,dropped around three per cent on Monday.
Oil markets are reacting this week to Ali al-Naimi, Saudi Arabia's former oil minister, who has retired from his job. (Vladimir Weiss/Bloomberg)

Events outside of Alberta were roiling the oil market, such as reports of more oil in storage in the U.S. Midwest and the retirement of Ali Al-Naimi, Saudi's longtime oil minister.

Al-Naimiwas the architect of the policy that caused oil prices to fall so dramatically in late 2014, but his replacement is thought to be even more supportive of that policy, which sees market share as more important than short-term prices.

Oil from the oilsands is mostly exported to refineries in the U.S. Midwest and on the Gulf Coast. But oil moves through pipelinesaround eight km/han hour, so the oil received this week in the Chicago arealeft Alberta in April and is going right into storage.

Oilsands operators have a lot of expenses right now and need revenue to pay for those.- Jackie Forrest, Arc Financial

"You produce the oil, it goes into pipelines and then it goes into inventories," said Robert Mark, an energy analyst with investment bank 3Macs.

"If you were to say we'd be short a million barrels a day for a couple of months, then it would have an impact."

Gas prices stable for now

Despite the pause in the flow of oil to the Suncor refinery in Edmonton, gasoline prices in Alberta have not moved yet. In fact, Roger McKnight, a petroleum analyst with En-Pro, expects prices to fall over the next 36 hours, but could move higher in the days to come

"Gasoline prices will go up relatively soon, I would imagine,because the keyrefinery hubs are the U.S. Midwest and Gulf Coast, and the U.S. Midwest usesalmost exclusivelyWestern Canadian select that comes from Alberta," said McKnight.

McKnight agrees that prices for gasoline will depend on when oilsands operations are able to start up again, but pointed out that even gasoline inventories are very high, so there is downward pressure on gasat least for the time being.
Nexen's Long Lake oilsands operations sustained some small damage from the wildfire. (CBC)

No timeline for startup

There has been no serious damage to any oilsands operation in the Fort McMurray area and the fire is now moving away from the city.

Suncor said that it is already preparing for startup once it is safe to do so, which will depend on the fires beingextinguishedor at least far enough away from oilsands operations that safety and air quality are notissues.

No one is clear when that will be, but Jackie Forrest, vice-president of energy research with ARC Financial, said thatonce the fires are out, it won't take long to get production back.

Forrest said that last year fires in Cold Lake, Alta.,caused some facilities to shut down, and within two days of the all-clear, the plantswere up and running.

"This may be a little different because the scale is a lot larger," said Forrest. "But I dothinkthat you will see startups fairly quickly because there is a fair amountof motivation to get those operations back on line."

"Oilsands operators have a lot of expenses right now and need revenue to pay for those."

The human element

Nearly 90 per cent of Fort McMurray's structures remain intact, but Alberta's Premier RachelNotleysaid that it will be two weeks before there is a plan for the return of people to the city.

"The real issue here for the oilsands is that we don't know the answer to is how functional will the city of Fort McMurray be," said Mark.

"There could be real challenges as tothe ability of people to live there, andthe human element is such a core part of these operations.

"If they can't live their lives, can't get back into their homes, it's going to be much more difficult for the Suncors ofthe world to starttheir operations."