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What Venezuelan turmoil could mean for Canada's oilpatch

More turbulence in Venezuela including the threat of United States sanctions on its crude oil exports has Canada's oilpatch watching carefully for how the impact will ripple across the industry.

Less Venezuelan oil could be good news for Canadian producers, but lack of pipelines holds back potential

Venezuela's political and economic outlook is unclear after opposition leader Juan Guaido, president of Venezuela's National Assembly, contested the presidency of Nicolas Maduro and swore himself in as interim president on Wednesday. (Carlos Garcia Rawlins/Reuters)

More turbulencein Venezuela including the threat of United States sanctions on its crude oil exports hasCanada's oilpatch watching carefully for howthe impact willripple across the industry.

Analysts say sanctions, or a further drop in Venezuelan oil output, could leaveAmerican refinerson the hunt for heavycrude from elsewhere, providing a potential price lift for Canadian producers.

But with limitedability to get more oil to the Gulf Coast, some believe the Canadian sector won't be able to seize the additional market share it otherwise might.

Longer term, if Venezuela changes political regimes, the upheavalcould see the South American country's oil production soar once again andchange the outlook for global prices.

"Any more reduction in Venezuela crude could have an impact on the price of heavy crude for Canadian producers,"said KevinBirn,anoilsandsanalyst with IHSMarkitin Calgary.

"In terms of our ability to maximize the benefit, we are constrained by our own infrastructure."

Venezuela's political and economic outlook is unclear afteropposition leader Juan Guaidocontested the presidency of socialistNicolasMaduroand sworehimself in as interim president on Wednesday. Maduro continued to carry out presidential duties on Thursday.

Traditionally, Canada and Venezuela produce heavy oil thatcompete for space in the U.S. market. However,Venezuela crude production has fallen dramatically in recent years amideconomic and political strife.

"There's been a developing opportunity for Canadian crude, in particular going into the U.S. Gulf Coast refineries," said Allan Fogwill,president of the Canadian Energy Research Institute.

"They were getting most of their heavy crude from Venezuela and Mexicoand a little bit from Canada.Now, with the concerns in Venezuela, that means those refineries are looking north to Canadian producers."

Fogwill said limited pipeline capacity and rising demand for Canadian crude at those refineriesis onereason why rail shipments of oil to the United States have been on the rise.

Maduro attends a rally in support of his government and to commemorate the 61st anniversary of the end of the dictatorship of Marcos Perez Jimenez in Caracas on Thursday. (Miraflores Palace/Handout/Reuters)

Last fall, Canadian shipping constraints to the U.S. led to a backlog of oil andsteep discounts on Alberta crude. Prices increased significantlywhen the province imposed mandatory crude production cuts for 2019.

The heavy blend of oil from Alberta'soilsandsknown as Western Canada Select was trading at $43.47 US a barrelon Thursday, up $1.36 US on anticipation that any decline in Venezuelan crude would result inmore demand for WCS.

RoryJohnston, a commodity economist at Scotiabank, said the Canadian heavy crude price could further improve depending on whether the U.S. moves forward with sanctions and what happens with Venezuelan production.

"But I think at this stage it's fairly unambiguously bullish for oil prices in the short term," he said.

RobertFitzmartyn,head of energy institutional research at GMPFirstEnergy,saidhe'll be watching to see how any related improvement in crude prices filters into the market and Canadian energy stocks.

"The stock market probably responds mildly," Fitzmartynsaid.

Longer term,however, there are even more questions.

If there is regime change in Venezuela, oil production couldrampup to more traditional levels and that might come to weigh on oil prices, Johnston said.

"What that likely would mean is actually a slightly more bearish outlook longer term," he said.

"Production has been declining so rapidly there [in Venezuela] that really, at this stage, virtually anyalternative governance is likely to be better at managing that production."

Fogwill said that if Venezuelan production returns to traditional levels, it will have an impact on world prices, too.

"If Venezuela came roaring back ... that could undermine the high price for oil."

Corrections

  • An earlier version of this story incorrectly referred to Nicolas Maduro as the interim president of Venezuela.
    Jan 24, 2019 5:35 PM ET