Canadian crude weakness returns after Alberta eases output limits

CALGARY (Bloomberg) - Alberta’s loosening of crude-production limits has renewed risks of a price collapse similar to the one experienced in 2018.

Oil sands benchmark Western Canadian Select is trading near the weakest discount to West Texas Intermediate in more than a month, data compiled by Bloomberg show. At the same time, the discount for Edmonton Mixed Sweet crude, a benchmark for Canada’s conventional producers and shale frackers, grew to the widest in more than a year.

Those differentials suggest that Canadian oil is at high risk of a “blowout,” according to a report by Credit Suisse analyst Manav Gupta.

Alberta’s government has loosened output limits imposed at the start of 2019 to counter a glut caused by a lack of pipeline capacity and too much oil production. Before the cuts, Western Canadian Select’s discount to WTI has grown as wide as $50 a barrel.

With those limits winding down, production is on the rise, prompting oil-pipeline operator Enbridge Inc. to increase rationing on its heavy oil line in December and January. A temporary shutdown of a major export pipeline and a rail strike in November contributed to record-high inventories in Western Canadian that month, according to Genscape data.

Should Western Canadian Select’s discount to WTI widen to more than $25 a barrel, the “Alberta government might be forced to step back in and raise the volumes on mandated cuts to control a bloating inventory situation,” Gupta said. A “wider WCS spread is a near-term tailwind.”