With the expansion in oil supplies, new pipelines have been spurting up all across North America to carry the excess oil and gas. Keystone XL oil pipeline, which is 1,179 miles long, is expected to transport excess oil from Alberta, Canada to refineries in Texas.


Keystone’s Transportation Of Canadian oil

It is believed, however, that even with Keystone’s transportation of Canadian oil, the expansion of supply in Canada will continue to outpace demand in  North America. Furthermore, North American E&P firms are eager to start operations in shale given the 58 billion barrels of shale oil reserves in the U.S. and 9 billion barrels of reserves in Canada.

Prices are expected to stay on the lower end of the graph in North America as a result (despite the Keystone XL pipeline). There is a high possibility that Canadian crude oil prices will stay below prices of other types of crude oil, discouraging investment in Alberta. Companies from Exxon Mobil Corporation (NYSE:XOM) to Canadian Natural Resource Ltd (NYSE:CNQ) (TSE:CNQ) lost a combined C$2.5 billion ($2.45 billion) in revenue last year due to lower prices. Oil investment fell 10 percent last year to $20.4 billion in Alberta.

Speaking of current price differentials, Western Canadian Select swaps for 2019 were priced at $61.95 a barrel, or $20.01 below similarly-dated WTI, the U.S. benchmark grade, yesterday, according to Bloomberg. Mars Blend was $84.23 and Dubai crude was recorded at $86.51 at the same time.

Figure 1: North American Crude Weekly Prices

Source: Bloomberg
Source: Bloomberg

In Canada, crude production has grown at a cumulative growth rate of 3.75 percent while consumption has grown at only a rate of 1.05 percent. According to EIA short-term forecasts, the Canadian supply is expected to grow to 4.62 million barrels per day by December 2014 from just 4 million barrels per day recorded in May 2013. This means that Canadian crude supply is in a glut and it cannot be sopped up by short-term solutions such as Keystone.

In addition, about 799,000 barrels a day of North Dakota and Canadian output is due to come online in 2013 and 2014, according to CAPP and the U.S. Energy Information Administration, sopping up almost all of the 830,000 barrel a day capacity that Keystone would add if it starts up as proposed in 2015.

Figure 2: Canada Crude Oil Fundamentals (000 barrels per day)

(Source: Energy Information Administration)
Source: Energy Information Administration (EIA)

Not far away from the Alberta sands, the growth of shale oil also poses a threat to North American oil prices. Bakken crude oil production grew by nearly 40 percent on a year-to-year basis in the first quarter of 2013 and the number of Bakken oil wells in production increased by 48 percent during the same period.

Figure 3: Bakken Crude Oil Production

(Source: Bloomberg)
Source: Bloomberg

The combined factors of shale oil production growth and Canadian production outpacing demand have tremendous repercussions for Canadian oil prices. Already Canadian prices do not offer incentive for investment in Alberta but further expansions in supply will not only threaten the WTI and Brent prices but also the prices earned by Middle Eastern giants like Saudi Aramco.

Despite the positive outlook on U.S. economic data and the temporary uplift of prices, the long-term scenario can be a difficult one for the oil market. Given the economic shrinkages in Europe, the bleak outlook on global demand, the supply expansions in North America and the refusal of OPEC nations to cut their output, oil prices can be expected to head towards a new low in the next couple of years.