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Central Canada fuel security at risk

Just when Ontarians were getting used to the low price of gasoline (82.9 cents in Barry’s Bay to 100.7 cents in Oakville on June 30), a U.S. Judge has sent a shockwave through the supply chain that could see pump prices in Central Canada climb significantly.

Screen Shot 2020-06-29 at 4.14.38 PMLast week U.S. Circuit Court Judge, James Jamo, shut down the largest input to Ontario’s fuel sector when he ordered Enbridge’s Line 5 to stop operations by June 26.

Line 5 carries up to 540,000 barrels of light and synthetic crude as well as natural gas liquids to refinery sites in Sarnia where the vast majority of Ontario’s fuel is produced.

Judge Jamo’s decision ruled against the continued operation of Enbridge’s west line and prevented the comapany from restarting its east line.

Judge Jamo is supported by Michigan Governor Gretchen Whitmer and Attorney General Dana Nessel, who both oppose the pipeline on the grounds that it constitutes a major environmental threat to the Great Lakes and should be shuttered permanently. Enbridge has suggested the move by Michigan is legally unsupportable and is proposing a US$500 million project to replace the line and enclose the segment that runs under the lakes in a tunnel. 

Line 5 delivers petroleum to seven refineries of which four are in Ontario (Imperial, Shell, Suncor). According to Imperial Oil spokesperson Jon Harding, the company’s two sites process 232,000 barrels a day, or about half the output of the Enbridge pipe. He says that a reduction in inputs from the pipeline would quickly impact Ontario motorists.  

“Reducing rates will likely result in shortfalls of gasoline, diesel and jet fuel in our distribution points in southern Ontario. That would happen within approximately a week,” according to Harding.

Line5_Map_Michigan_705xAt issue is the safety of Line 5, a system that was built in 1953. The Enbridge pipe runs along a 1,040-kilometre route through to Wisconsin and Michigan, where it channels under lakes Huron and Michigan for 7.2 kilometres before heading to refineries in Sarnia. It is this underwater section in the Straits of Mackinac that is a point of contention for environmental lobbyists that have been fighting for the closure of the pipeline for years.

Screen Shot 2020-06-29 at 4.15.22 PMThis most recent challenge to Line 5 came about following a survey where Enbridge discovered last week that a support anchor had shifted its position under the Strait. Enbridge shut down the operation and notified the state. Michigan followed up by filing for an injunction to shut Line 5 until the state had reviewed all the engineering data. Both sides are expected back in court this week.

OCTANE editor Kelly Gray can be reached at kgray@ensembleiq.com 


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Canadian oilpatch cutbacks expected to continue despite OPEC agreement

Canadian oil wells will continue to be shut down amid weak global oil prices despite an agreement to limit production struck by OPEC and other major producers on the weekend, producers say.

The price of Western Canadian Select bitumen-blend oil rose by almost five% on Monday morning from Thursday’s close, but remained stuck below US$5 per barrel as U.S. benchmark West Texas Intermediate oil prices inched up by an equally modest amount.

Both oil prices drifted lower through the day on Monday and wound up in negative territory, with WTI down 35 cents at US$22.41 per barrel and WCS settling at US$3.96, down 43 cents or almost 10%.

“It’s all helpful but I still think we’re in a very challenging situation,” said Grant Fagerheim, CEO of Calgary-based Whitecap Resources Ltd., in an interview.

The agreement comes too late to allow a quick rebalance in the oil supply and demand market, he said, explaining that oil storage facilities have rapidly been filling while Saudi Arabia and Russia ramped up output after failing to reach an agreement to continue production limits in March.

The deal signed Sunday will result in a reduction of 9.7 million barrels per day of crude production in May and June and provides for lower reduction levels to follow.

Fagerheim said Whitecap is working on an analysis of all of its western Canadian wells to determine which are currently cash flow positive.

“If we have to pay to produce, we’ll look to suspend that production,” he said, adding shut-ins could start as soon as this weekend.

The Canadian industry has shut down operations producing about 400,000 bpd but Fagerheim said he expects that will more than double to as much as one million barrels per day _ 20% of the total _ offline over the next few weeks.

The OPEC+ deal provides some assurance and stability to markets but it doesn’t match the reduction in demand caused by measures taken to deal with the COVID-19 pandemic, said Kevin Birn, a Calgary-based oil market analyst at IHS Markit.

“The scale and the scope of this agreement is really a big deal,” he said in an interview. “It is unprecedented … but sadly, the demand destruction we’re seeing is even greater.

“What that means is this doesn’t solve the situation linked to the virus and the trajectory of the virus.”

Global oil demand is expected to shrink by about 20 million bpd _ one in five barrels of production _ in the current month, IHS says in a forecast.

Canadian producers have already shut down wells accounting for about half a million barrels of oil per day because they can’t make money at current prices, Birn added, and that trend will continue until global energy demand rebounds.

Oil producers will shut down their least profitable operations first, likely starting with heavy oil, where prices have been hit harder than light oil, said Jeff Tonken, CEO of Birchcliff Energy Ltd. and chair of the Canadian Association of Petroleum Producers.

“We’re going to have forced shut-ins because the economics don’t work,” he said, while also predicting an eventual recovery.

“What will happen is demand will come back as people start to come out of their homes and as the economy starts to move.”

Shale oil wells in the United States and Canada also produce natural gas. Tonken said a recent firming of natural gas contract prices likely results from expectations that associated gas output will fall as oil wells are shut down.

In a report updated on Sunday, Desjardins analysts said more than one million barrels per day of western Canadian oil production will probably be taken offline despite the OPEC deal.

“Some cuts are better than no cuts _ that much is clear,” the report notes.

“But when the 9.7 million bpd cut is put into the context of a 25 to 35 million bpd hit to global crude demand, it clearly is not enough.”


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How low will gas go?

Screen Shot 2020-03-24 at 12.28.39 PM“Oil markets are poised to get worse before they get better, ushering in a new era for petroleum,” U.S.-based Citi Bank said in a recent note to its clients. Already, oil is being produced below the cost of production, with prices falling for Western Canadian Select Crude to under (US) $10 (actually hit (US) $7.36) a barrel for the first time.

Simply, the petroleum market got hammered with a one-two blow, where demand has fallen off sharply and supply has increased dramatically. The result is dispenser prices that few of us have seen in recent years.

The COVID-19 concern has Canadians staying at home and working in place. This means less fuel usage for things like commuting and air travel. Less demand drives prices downward. Add to this the recent dust-up between Russia and the Saudis over OPEC production targets, whereby both parties are pumping oil like there is no tomorrow. Russia is selling at a loss as a way to build European market share and the Saudis (and UAE) are battling back with excess production to bring pressure onto Russia in a bid to get them to ratchet back well flows. The upshot is a glut of petroleum products at a time when world demand is at an all-time low.

The Russians have said they have enough reserve capital to keep up this fight well into next year. The Saudis have cash to burn, as well as low production costs, and have said they will keep up pressure till the sides get back to the bargaining table.

Here in Canada Syncrude and Suncor have scaled back maintenance work on upgraders due to COVID-19 and the companies’ inability to obtain workers for the task. The result here is that synthetic crude continues to flow at a time when levels were set to be throttled back. The result is even more capacity in the system.

The outcome is that gasoline prices have fallen and could drop even more. Some analysts predict an additional 10% to 15% decline under canopy as we move into April. A look at prices this week sees Vancouver around the $1.00 mark for a litre of gas. This is a drop from the high of $1.70 we saw last year. British Columbia is around 0.75 cents a litre. Ontario is reporting sales of 0.59 cents and Calgary motorists discovered pumps offering prices of 0.55 cents Tuesday morning. Nova Scotia is selling as low as 0.66 cents.

The bottom line is that Canadians can expect gas prices to decline further over the short term with prices in Ontario possibly coming in around the 0.60 cent mark later next month. Until Russia and OPEC makeup and play nice expect the barrel price to continue to stay low for the foreseeable future.


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Fuel prices and Canadian dollar expected to show gains in 2020

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Shutterstock

A spike in current and long-range gasoline pricing will come as no surprise to retailers and most Canadians. Expect the cost of fuels to rise at the dispenser as we move into 2020. These hikes happen due to four factors that determine the consumers’ price. Dispenser price is impacted by the cost of crude oil, the margins at the refinery, the cost to market fuel, and taxes. Here, key elements are the rising price of crude and—thanks to carbon pricing schemes—taxes are up as well.

Roger McKnight

Roger McKnight

According to market analyst Roger McKnight of En-Pro International, an Oshawa, Ont.-based consultancy, two key crude oil price factors will combine to bring up pump prices. McKnight points out that in West prices are determined by what is known as ‘Gyration of Crude’ a factor that takes into account world pricing, while the East is impacted by straight up market speculation. These forces will come together as the world faces another political challenge in the Middle East.

Already prices were on the rise thanks to the January 1 rollout of our Carbon Tax. The tax adds about 4.5 cents to each litre of gasoline. McKnight suggests that Canadians could see a spread of 18 cents between prices in Toronto and Calgary under these conditions, due largely to the lower tax burden in Alberta.

The cost of raw materials is also up. Currently Brent Crude is above (US)$70 a barrel up (US)$4 since last week. Prices have not been this high since September when drones took out some of Saudi Arabia’s Aramco capacity.

Retailers are reporting prices at fuel dispensers are up, too. This week, Vancouver stations are selling a litre of fuel for $1.41, with Calgary showing 0.99 cents (+2%) on dispensers. In Toronto, Montreal and Halifax, prices are also up, with Montreal hitting a high of $1.27.  Expect fuel prices to keep edging upward as world events ramp the challenges to routine shipments.

On the bright side, Canada is the world’s fourth-largest oil producer and as such our dollar is tightly wound with world crude pricing that is bought and sold in U.S. dollars.  Expectations are that, thanks to a resurgence in oil prices, the Canadian dollar will hit 82 cents U.S. sometime in 2021. When oil prices climb, the amount of U.S. dollars Canada earns on each barrel of oil it exports is high. Indeed, we export 96% of our oil output to the U.S. As such, the increase of U.S. dollars flowing north creates a rise in the value of the Canadian dollar. This increase in Canada’s dollar value means imported goods are less expensive. This can have a positive impact on the refining margin, where many of the products used to produce gas and diesel are purchased in U.S. funds.

One thing is for sure. Expect market volatility and crude price climbs over the next few months as world political conditions remain in flux.