Key Takeaways
- The U.S. military’s capture of the Venezuelan leader and President Donald Trump’s plans to put the country’s oil industry into American hands have led to a decline in shares of Canada’s biggest oilsands producers.
- The potential lifting of U.S. sanctions on Venezuela could lead to increased competition for Canadian heavy oil in the U.S. market.
- However, experts believe that any discounts on Canadian heavy oil prices would be modest, and the market reaction may be overdone.
- Canada should consider diversifying its export markets to protect itself from threats like this and increase its motivation to build capacity to export oil to Asia.
Introduction to the Situation
Shares in Canada’s biggest oilsands producers came under pressure after the U.S. military captured the Venezuelan leader and President Donald Trump announced plans to put the country’s oil industry into American hands. This news led to a decline in shares of companies such as Cenovus Energy Inc., Canadian Natural Resources Ltd., and Suncor Energy Inc. The TSX energy subindex was also down more than three per cent. Refineries on the U.S. Gulf Coast are set up to process heavy crude like that produced in Alberta’s oilsands and in Venezuela. However, U.S. sanctions on Venezuela have meant that virtually none of its supplies go to the U.S. market today.
Impact on Canadian Oil Prices
According to Jackie Forrest, executive director of the ARC Energy Research Institute, if the restrictions on Venezuelan oil were lifted, Canada may have more competition in terms of Venezuelan oil accessing the U.S. Gulf Coast. However, she believes that any discounts on Canadian heavy oil prices would be modest, in the US$2 to US$3 per barrel range, and the market reaction may be overdone. Canada sends about 400,000 barrels a day of crude to the world’s largest refining complex on the Gulf Coast, a relatively small portion of the roughly four million barrels a day of oil Canada supplies to the U.S. overall. Most currently goes to refineries in the Midwest region, which is deeply integrated with pipeline networks originating in Alberta.
Long-term Implications
Dane Gregoris, managing director of Enverus’s oil and gas research group, believes that while political changes happen quickly, industrial changes happen very slowly. It could be months or even years before the fate of sanctions and Venezuela’s production shakes out. However, he thinks there’s a reasonable case to be made for investors to reduce their exposure to Canadian energy names under the assumption that more heavy oil may eventually flow to the U.S. market and weigh on Canadian prices. Derek Holt, head of capital markets economics at Scotiabank, wrote in a report that it’s clear Trump wants to take control of Venezuela’s oil reserves, but he cautioned against leaping to the conclusion that this will unleash a torrent of new supply on world markets.
Venezuela’s Oil Production
Venezuelan production peaked at 3.5 million barrels a day in 1998, and it now churns out less than a third of that, with most going to China. Holt doubts that a U.S. intervention will lead to a swift return to its glory days, given the country’s energy and broader infrastructure lay in shambles, and political uncertainty is off the charts. The United States’ own production has been crowding out imports, and the world is awash in supply, putting pressure on global prices. The price of West Texas Intermediate crude saw a bump on Monday, but it was still below the US$60 per barrel mark and about 20 per cent lower than it was at this time last year.
Canada’s Response
Forrest believes that it could take five to 10 years for Venezuela to meaningfully ramp up its production if it were to get a stable government and attract investment. However, she thinks that long term, it makes sense for Canada to send more of its oil to Asia. Hopefully, this situation will increase Canada’s motivation to build capacity to export oil to Asia and diversify its export markets to protect itself from threats like this. Holt also wrote that the prudent thing for Canada to do would be to act with a greater sense of urgency in terms of building capacity to export oil to Asia. By doing so, Canada can reduce its reliance on the U.S. market and protect its oil industry from potential threats.