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Demand to drive Canadian oil prices higher in 2019: Deloitte

Deloitte notes that Canadian oil prices should also strengthen in 2019 because of improved export capacity as a result of the Alberta government's plan to purchase additional rail cars to transport crude oil and the expanded capacity of Enbridge's Line 3 pipeline, which transports a variety of Canadian crude oil to the United States.

Deloitte notes that Canadian oil prices should also strengthen in 2019 because of improved export capacity as a result of the Alberta government's plan to purchase additional rail cars to transport crude oil and the expanded capacity of Enbridge's Line 3 pipeline, which transports a variety of Canadian crude oil to the United States.

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Prices for Canadian heavy and light oil should improve somewhat in 2019 because of increased demand from refineries in the United States, improving transportation capacity and mandatory productions cuts in Alberta, according to Deloitte's Resource Evaluation and Advisory (REA) group. In its latest report, Deloitte says these factors should begin to reduce the current oversupply of Canadian oil and help narrow the larger-than-usual differentials with WTI prices that were present in the final quarter of 2018.

"The severe imbalance between Canada's production and its capacity to export that oil caused Canadian oil price benchmarks to collapse over the past few months," says Andrew Botterill, Partner, REA group. "Heavy oil differentials were as high as US$45 per barrel in mid-November while light oil differentials reached as much as US$35 per barrel, although they did begin to drop back slightly toward the end of the year as refineries in the U.S Midwest returned to more normal utilization rates for Canadian oil."

Botterill says the Canadian supply glut remains an issue, however, noting that storage stockpile volumes in Alberta rose to approximately 35 million barrels in 2018. Mandatory production cuts imposed by the Alberta government and which take effect this month should reduce production by 325,000 barrels a day until the excess storage volumes dissipate, after which the cuts will drop to 95,000 barrels a day for the rest of 2019. Deloitte expects this will decrease differentials for Canadian oil price benchmarks and increase provincial royalty revenues in Alberta and in Saskatchewan, where there are no mandatory production cuts but where crude prices will also rise because of the reduction in oversupply.

Deloitte notes that Canadian oil prices should also strengthen in 2019 because of improved export capacity as a result of the Alberta government's plan to purchase additional rail cars to transport crude oil and the expanded capacity of Enbridge's Line 3 pipeline, which transports a variety of Canadian crude oil to the United States. The extra rail cars should increase exports by 120,000 barrels a day by 2020, while the Enbridge pipeline will add approximately 370,000 barrels a day of export capacity, an increase of about nine percent.

"Increased demand for Canadian oil from Alberta's Sturgeon refinery and from U.S. Gulf Coast refineries looking to replace some of their heavy crude supplies that used to come from Mexico and Venezuela is another reason we expect the price differential with WTI to continue narrowing in 2019 and beyond," says Botterill. "At this point, we are forecasting a price of US$58 per barrel for WTI this year and C$50 per barrel for WCS".

Botterill says Deloitte expects Canadian natural gas prices to continue to trail behind the Henry Hub benchmark in 2019 despite some recent gains. No near term growth is expected for Canadian natural gas production because of high U.S. production rates and the possibility that short-term demand in Alberta could slow as oil sands producers - whose extraction efforts account for about 40 percent of natural gas consumption in the province - scale back their operations due to the mandatory production cuts. Several natural gas producers continue to take advantage of any available price diversification opportunities, however, including shipping volumes to East Coast markets where prices are higher.

"We expect low AECO prices to continue for several years given the current situation," says Botterill. "Our current forecast for AECO is C$1.75 per Mcf in 2019 while Henry Hub should be US$3 per Mcf."

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