What happened

Shares of Canadian oil producers are rallying today. Several had soared by double digits by mid-morning, including Canadian Natural Resources (CNQ -0.65%)Cenovus Energy (CVE 0.02%)Suncor Energy (SU -0.32%), and Ovintiv (OVV -1.80%).

A couple of factors are helping fuel the rally in Canadian oil stocks. Not only are oil prices bouncing back a bit today, but the country's oil sector also got some good news on addressing its infrastructure issues. 

An oil pump with snow on the ground.

Image source: Getty Images.

So what

Oil prices in Canada have cratered over the past month. The price of Western Canadian Select (WCS) crude recently fell below $5 a barrel, which is less than it costs to ship a barrel to refineries. Several issues have weighed on oil prices in Canada, including the impact the COVID-19 pandemic is having on demand and the lack of pipeline capacity to transport crude oil out of the country. 

The country's producers, however, got some good news today on its infrastructure issue. Canadian pipeline giant TC Energy (TRP -0.40%) said it's proceeding with construction of the Keystone XL pipeline. It made that decision after the government of Alberta agreed to help finance the project through a direct equity stake and by backing a project-level credit facility. That will provide TC Energy with the financing backstop needed to begin construction, which puts the project on track to enter service in 2023.  

The approval of this 830,000-barrel-a-day pipeline will help increase the flow of oil out of Western Canada to market centers along the U.S. Gulf Coast. That should narrow the discount between the price of WCS and the U.S. oil benchmark, enabling Canadian producers like Canadian Natural, Cenovus, Suncor, and Ovintiv to earn more money per barrel. 

Another factor helping boost Canadian oil stocks is that more companies are cutting their capital spending plans and production guidance, which will help ease the near-term glut of oil in the country as it waits for Keystone XL to come on line.

Today, for example, Imperial Oil (IMO -1.05%) reduced its 2020 capital spending plan by 30%. While Imperial didn't say how much this reduction would limit its production this year, it likely will have some effect on output in the future, which will help alleviate some of the country's oil glut. 

This move follows similar ones by most other Canadian producers. Cenovus, for example, cut its 2020 budget by 32% a couple of weeks ago, which will result in a 5% decrease in its production this year. Suncor, meanwhile, recently reduced its budget by 26% and lowered its 2020 production outlook by 7%. 

Canadian Natural Resources also recently cut its 2020 spending plan. But the company maintained its production guidance due to the low-decline nature of its operations. Ovintiv, likewise, recently slashed its spending, dropping 16 of its drilling rigs. As a result, it will only have two rigs operating in Canada and five in the U.S., which will affect its production in the coming quarters. 

Now what

Oil producers in Canada have struggled in recent years because there isn't enough pipeline space for all their production. That has hurt the sector this year as oil demand has cratered due to COVID-19 at the same time that supplies are soaring because of the collapse of OPEC's market support agreement with Russia. 

But the industry has addressed those issues by cutting spending and reducing near-term output. That should help the sector until TC Energy completes the Keystone XL pipeline, which should finally help ease the country's pipeline capacity issues. Though that assumes it completes the project without a hitch, which is no sure thing.