What happened
Shares of Canadian oil producers are skyrocketing on Monday, led by Canadian Natural Resources (CNQ -2.13%), Cenovus Energy (CVE -1.91%), Baytex Energy (BTE -3.18%), and Crescent Point Energy (CPG -2.96%), which were all up double digits by 10:00 a.m. EST. Fueling the surge was an order by the Premier of Alberta that oil companies in the providence cut their production by 8.7% beginning on the first of the year to boost prices in the region.
So what
Western Canadian Select, or WCS, has been trading at a discount of more than $40 a barrel to the U.S. oil price benchmark, WTI, because the country is currently producing 190,000 barrels per day (BPD) more oil than its pipeline system can handle. Because of that, Alberta, which is the heart of Canada's oil sands region, ordered producers to cut output by 325,000 BPD until oil storage levels there start falling, which represents 8.7% of the country's current production rate. After that, the production restriction will drop to an average of 95,000 BPD until the end of 2019 when the new rule expires.
Image source: Getty Images.
Cenovus Energy issued a statement praising the move, for which it had advocated due to the extreme pressure on regional oil prices as a result of the pipeline issues. The company and Canadian Natural Resources had already curtailed 140,000 BPD of their production in response to the plunge in WCS in recent months. The companies hope that reducing production will boost regional oil prices as well as their profitability.
An improvement in Canadian oil prices would also help smaller producers like Baytex Energy and Crescent Point Energy, which need higher oil prices to support their operations. Baytex Energy, for example, requires WTI to average $55 and WCS to only trade at around a $20-per-barrel discount to finance its 2019 spending plan. That narrower discount is now much more likely given the production cut. Crescent Point Energy, meanwhile, has less exposure to the regional oil price issues in Canada since it doesn't produce the deeply discounted heavy oil found in Alberta. However, it still should benefit from an uptick in prices since that issue has weighed on the shares of most Canadian oil prices in the past few months.
Now what
The government of Alberta is taking action to ease a regional glut of oil brought on by the continued delays of much-needed oil pipeline projects. The hope is that by forcing oil companies to cut production, it will ease the regional oversupply that has put significant pressure on prices. That should boost the profitability of all oil companies in the country over the next year, which could drive their stock prices even higher, assuming global oil prices don't continue to fall, which has been the case in recent weeks.
