​​Oil storage tanks are filling up, making production cuts ‘inevitable’ in Canada

Image: Cenovus Energy Inc.

Rock-bottom prices for Canadian oil and a lack of demand are setting the stage forinevitableproduction cuts, according to Goldman Sachs, which says the industry could run out of storage space within weeks.

LandlockedCanadian crude could see prices go negativemeaning producers would pay customers to take the oil, analysts led by Emily Chieng said in a note to clients. Shipping it out by railisn;teconomic, and increased production from OPEC nations could displace demand for Canada’s barrels, Chieng said.

Western Canadian Select crude traded under $10 per barrel Wednesday, according to NE2 Group. Canadian heavy crude has becomeso cheapthat the cost of shipping it to refineries exceeds the value of the oil itself.

The dismal economics of selling Canadian oil aren’t the biggest factor in Goldman’s forecast of production cuts. A lack of storage capacity is.

Given the loss in demand from refineries, “we expect that commercial inventory levels could be breached withintwo to threeweeks if Canadian production is not reduced further,” Chieng wrote.

"Given this, it is not the challenging economics of oil sands assets in the current price environment that drives the decision to shut in production, but rather, the physical limitations of storage capacity in a demand challenged environment that will ultimately drive producers to organically curtail output,she said.

Goldman estimates that Canadian producers have announced production cuts of about 100,000 barrels per day. Suncor Energy Inc. said last week it willshut inone of its two so-called trains at its two-year-old, 194,000 barrel-a-day Fort Hills oilsands mine. The company also is delaying thestart upof its MacKay River oil sands wells to May.

The bank sees Suncor as Canada’s best positioned energy company to navigate the current environment, given its integrated business and “more resilient” balance sheet. Suncor shares have fallen 48per centthis year.

© 2020 Bloomberg L.P.

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