Shares of Canada’s largest oil producers fell on Monday, as markets opened for the first time since the capture of Venezuelan President Nicolás Maduro by U.S. forces over the weekend.
America is now set to gain control of the Latin American nation’s battered heavy oil industry. For Canada, the move could put pressure on its oil exports to its southern neighbour.
Canadian producers Suncor Energy (SU.TO)(SU), Imperial Oil (IMO.TO)(IMO), Cenovus Energy (CVE.TO)(CVE), and Canadian Natural Resources (CNQ.TO)(CNQ) saw their stocks fall in early trading on Monday. Meanwhile, shares of their American counterparts, like ExxonMobil (XOM) and Chevron Corporation (CVX), moved in the opposite direction.
Canada’s iShares S&P/TSX Capped Energy Index ETF (XEG.TO) fell as much as 6.3 per cent on Monday.
“America’s capture of Venezuelan leader Nicolás Maduro on January 3 — with control over the country’s oil sector a core objective of the military operation — constitutes a longer-term structural risk for oil prices in general, and Canada’s heavy oil export markets in particular,” RBC Capital Markets analyst Greg Pardy wrote in a note to clients on Sunday night.
“But restoring the country’s production back towards the three million [barrel per day] range would require years of annual investment of some $10 billion, anchored by a stable security environment — both of which are tall orders.”
Canada’s main heavy oil benchmark, Western Canadian Select (WCS), is priced at a discount to America’s light oil benchmark, known as West Texas Intermediate. The difference reflects Canada’s heavier grade, as well as transportation costs, and other factors. The start of the Trans Mountain Pipeline Expansion Project last summer has shrunk this discount to its tightest range in over a decade.
Pardy says full sanctions relief for Venezuela could unlock several hundred thousand barrels per day of output over the next year. However, on Sunday, he predicted the discount on Canadian oil will “remain relatively narrow” versus the American benchmark price (CL=F).
“The kneejerk equity market reaction to the Venezuelan developments may cause Canada’s energy producers to come under pressure amid elevated concerns over the direction of WCS spreads and relative valuation levels,” Pardy wrote.
“Sufficient export pipeline capacity and market diversification should enable WCS geographical spreads to remain relatively narrow.”
On Sunday, oil market researcher Rory Johnston added context to the notion that revived exports of Venezuelan oil could challenge U.S. demand for Canadian crude. Firstly, he points to the inherent advantage of Canada’s link to U.S. refineries in the Midwest via pipeline.