Explainer: Why is Canadas Alberta forcing oil production cuts?

Alberta premier announces 8.7 per cent oil production cut to increase prices

Alberta Premier Rachel Notley Orders Oil Production Slashed To Fight Price Crisis

Western Canadian Select catapulted to US$32.91 a barrel on Monday morning, up around US$11 from Friday's close, as the market immediately priced in the impact of Alberta Premier Rachel Notley's plan to draw down the province's crude backlog via production cuts.

Notley has ordered a mandatory 8.7 per cent cut in oil production to reduce a glut of Alberta oil that is forcing steep price discounts.

The price differential between Western Canadian Select and West Texas Intermediate has fluctuated in recent weeks, peaking at around US$36 (C$47) a barrel.

Indeed, when Suncor reported third-quarter results on October 31, it said the discount on heavy Canadian oil prices was having a "minimal" impact on its operations.

Notley said that she expects the cuts to remain in place until the 35 million barrels of oil now sitting in storage because of what she describes as "unsustainable" transportation bottlenecks are shipped to market.

A wider-spread collapse in oil prices could wash away much of the gains from Alberta's production cuts, several analysts said Monday.

"Even before these revisions our forecasts were below consensus for Canadian GDP based in part on the dampening effects of slower global growth on the oil patch and other sectors", says Shenfeld.

"Albertans know that extraordinary times call for decisive action", Notley said, taking the opportunity to slam Ottawa for failing to intervene.

Alberta is also planning on buying as many as 80 locomotives and 7,000 rail tankers - expected to cost hundreds of millions of dollars - to move the province's excess oil to markets and address the pipeline bottleneck. The cuts are scheduled to end on December 31, 2019.

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Companies that produce less than 10,000 barrels a day will not be affected by the daily cuts.

Moe said Saskatchewan's oil industry differs from Alberta.

Suncor said in a statement Monday that price differentials were already narrowing.

The production curbs announced by Alberta targets producers that pump out more than 10,000 bpd, or just 25 of the roughly 300 oil companies now operating in the province.

The production curbs will provide some cushion for producers, but will not eliminate the discount on heavy Canadian oil that has persisted for many years, said Jihad Traya, manager at energy consultancy firm Solomon Associates LLC in Calgary. The cut seems to be working, however, and that should be welcome news right now: yesterday Reuters reported weather-related power disruptions had occurred on two major Canada-U.S. pipelines, Keystone and the Mainland system.

Opposed to the cuts, Suncor says authorities should let the market regulate itself. Shares of oil producers operating in Alberta also surged, with Cenovus posting its biggest intraday gain ever.

"What's good for the residents is that if we can get more money for our oil and for our gas, it'll be more money in the civic offers, which we've in the past have used as a dividend for property taxes or to build things like the Leisure Centre or Event Centre", Clugston added.

The reduction will drop to an average of 95,000 barrels a day until curtailment ends at the end of 2019, when Enbridge's new Line 3 starts operating.

Still, MacNaughton says he has reached out to his counterpart Kelly Craft to emphasize the cuts are only temporary and that Canada does not feel they violate existing free-trade rules.

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