Canadian oil prices surged to a four-month high on Monday, a day after Alberta said it would mandate temporary production cuts that some producers had requested after pipeline bottlenecks forced their oil to be sold at severe discounts.
Alberta Premier Rachel Notley said Sunday the government will force producers to cut output by 8.7 percent, or 325,000 barrels per day (bpd), until excess crude in storage is reduced.
Canada is one of the world’s largest oil producers, supplying more than 4 million barrels a day, but its heavy crude oil traded in October at a discount of more than $52 a barrel to U.S. oil due to transportation constraints that made it unprofitable to sell.
On Monday, Western Canada Select (WCS) heavy blend crude for January delivery in Hardisty, Alberta, traded at a discount of $19.50 a barrel below U.S. crude futures, traders said, the smallest discount since July 18. WCS was seen at about a $28.75 a barrel discount on Friday.
The mandated cuts are controversial because producers that have their own refineries, like Suncor Energy Inc and Husky Energy Inc , are not facing the same low prices.
Suncor said on Monday it is assessing the impact of the government’s announcement and believes the market is the most effective means to balance supply and demand and normalize differentials.
“Less economic production was being curtailed and differentials were narrowing as a result of market forces,” Suncor said in a statement, adding that it will discuss any specific impact from the cuts when the company issues a 2019 outlook.
Cenovus Energy, which has oil sands projects in northern Alberta, commended Notley for making “the difficult but necessary” decision.
“We advocated for this mandatory production cut because we continue to believe it is the only short-term solution to the extraordinary situation Alberta finds itself in,” Alex Pourbaix, the chief executive officer, said on Sunday.
Several heavy crude producers, including Canadian Natural Resources Ltd and Cenovus, have voluntarily curtailed production in recent weeks.