Extract from crude oil:
As the world waits for OPEC and many settle in for the holiday season, things have been eventful in North America, led by Canada. On 2 December, in a rare occurrence (the first time since the 1980s), the Alberta government announced they would intervene and mandate production cuts of roughly 0.33 mb/d—starting in January and continuing through Q1 19—to be followed by a lower mandatory cut of roughly 0.1 mb/d for the remainder of 2019. The aim of the Alberta government is first, to draw down inventory to ‘normal’ levels (they peg the excess stocks at 16 mb), and second, to match takeaway capacity with production in order to raise and stabilise prices and protect the small independent Canadian producers. The 0.33 mb/d cut referenced by the government equates to an 8.7% cut from August levels, but determining the baseline on a producer level will not be so straight forward, especially as producers with integrated refineries have been guaranteed supplies. If the baseline used is August production levels of 3.73 mb/d, then the new production level would be 3.40 mb/d. However, September production in Alberta had already fallen to 3.44 mb/d, and producers had previously announced voluntary cuts in their Q3 18 earnings call for Q4 18 amounting to 0.1 mb/d. So, if cuts are based on the higher August numbers, production will be just 40 thousand b/d lower versus September levels, and inventories will not be drawing down at such a high rate in Q1 19 as the headline would suggest. But if the baseline is September, at 3.44 mb/d, and the inventory drawdown is achieved by Q1 19, we would expect production to rise sequentially q/q in Q2 19, barring any upgrader maintenance, as cuts should ease with the addition of rail capacity. This implies flows on pipelines and committed rail will remain full, first through drawing down inventories in Q1 19 and then by rising production. The cuts will support WCS at Hardisty, reduce the extent of the contango and potentially support heavy crude prices on the USGC.
Extract from oil products:
US gasoline stocks increased by 1.7 mb w/w to 226.3 mb (+5.4 mb y/y), with a significant build in PADD 2 of 2.6 mb to finish the week at 49.4 mb. PADD 3 inventories fell by 2.0 mb w/w to 80.8 mb. PADD 1 inventories were 2.9 mb higher y/y after a small w/w build of 0.3 mb on very low imports of 0.19 mb/d. The end of the turnaround season in PADD 2 has pressured gasoline prices in the region, closing the arbitrage from the USGC to the Midcontinent on paper. Losing PADD 2 as an outlet for excess gasoline barrels from the USGC is putting additional pressure on the USGC market. The gasoline situation shows no signs of relief and oversupplies will be compounded by the return of a number of gasoline-exporting refineries from maintenance in Europe, including ExxonMobil's Fawley plant in the UK. However, Irving Oil's 0.3 mb/d St John refinery is likely to be partly offline for a long period given that the company is buying spot cargoes to cover its physical shorts, which could limit builds in PADD 1. US regular gasoline prices were 5 cents lower y/y at $2.45 per gallon for the week to 3 December.