North American energy traders are reluctant to take up long-term positions on Canadian crude price moves, preferring to stick to spot deals, as uncertainty around government intervention in the market grows following delays to a critical pipeline project.
Enbridge Inc. unexpectedly said earlier this month its Line 3 oil pipeline will be delayed until the second half of 2020, dealing another blow to the oil-rich province of Alberta, which is struggling with long-running congestion on export pipelines.
Severe pipeline bottlenecks depressed Canadian heavy oil prices to the weakest on record last year, prompting the Alberta government to order mandatory production cuts effective Jan. 1, a move that sent prices skyrocketing and traders scrambling to cover positions.
While some producers welcomed the government cuts, others including Suncor Energy and Imperial Oil criticized the move for causing uncertainty and unintended consequences, such as disrupting rail shipments of crude.
Imperial declined to comment and Suncor did not offer an immediate comment.
Now, Enbridge’s delay has heightened concerns the government may impose cuts for longer than its current target of year-end.
“Everything we heard from the government was that they were 100 per cent relying on Line 3 coming into service at the end of 2019,” said Tim Pickering, president of Auspice Capital Advisors in Calgary, which manages a Canadian crude exchange-traded fund.
“That [delay] is definitely something that may have them responding as the market changes,” he added.
Canada is the world’s fourth biggest oil producer and the heavy crude it produces is in high demand in the United States, where refiners are already facing a shortage due to sanctions on Venezuela and lower production from Mexico.
But sources at producers and refiners on both sides of the border said it has become more difficult to make a compelling case to management to buy Canadian oil contracts for later in the year because of the uncertainty related to what the government might do.
Not being able to lock in forward prices typically heightens risk for producers and refiners, leaving them more exposed to fluctuating spot commodity prices.
Longer-dated trading volumes in the Canadian heavy benchmark Western Canada Select (WCS) vary each month, making year-on-year comparisons of trading volumes difficult, traders said.
But buyers of Canadian crude in the U.S. Gulf Coast have held back from taking up positions to hedge their exposure or betting on Canadian prices for later in the year for fear of big losses if the government makes an unexpected move, sources said.
“I won’t take any forward positions in Canada right now. Everyone is wondering what the government is going to do … one announcement can ruin your year,” one trader said.
Hedge funds – which typically trade financial contracts rather than physical barrels – are also reluctant to get involved in Canada now, Pickering said, leading to a thinner market with fewer participants.
Liquidity in the Canadian crude ETF that Auspice manages surged last October as Canadian crude’s discount to U.S. oil futures ballooned, attracting big U.S. market makers like Virtu Financial and Jane Street, Mr. Pickering said. That liquidity dropped off once the government stepped in.
Further muddying the picture, Alberta Premier Rachel Notley’s New Democratic Party government is currently trailing in the polls ahead of a spring election, facing a stiff challenge from the United Conservative Party.
It is unclear what impact the elections would have on planned curtailments.
Alberta government spokesman Mike McKinnon said the cuts had been applied fairly and equitably.
“A short-term production limit is not ideal or sustainable, which is exactly why we have a plan to move more oil by rail in the coming months while we fight for the long-term solution of building pipelines to new markets,” he said.
One Calgary-based trader said the Alberta government had ruined trust in the Canadian heavy crude market. Market participants who were bearish on 2019 WCS prices because of fundamentals like rising production and tight pipeline capacity were wrong-footed by the curtailments and ended up losing “a ton of money,” he said.
“I just think it’s too risky now. So no one is trading that far out,” another Calgary-based trader said.