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This Overlooked Canadian Oil Niche Is Making Traders Billions

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Via Oilprice.com

Canada’s oil industry continues to face major pipeline bottlenecks as production far outpaces transport capacity, a persistent issue that has led to significantly decreased oil prices and a major loss of profits for Canadian oil producers. Despite the fact that the North American nation is home to the third largest crude oil reserves in the world, and that there is plenty of demand for that oil, Canada simply does not have the infrastructure to get the oil to market.

The Albertan government has made concerted efforts to lessen the oil-rich Canadian province’s ever-expanding crude glut, most notably with the use of production cuts over the last year. In the short term this approach was extremely effective, but ultimately was not a sustainable solution–nothing short of adding new pipeline infrastructure, and a lot of it, can truly fix Canada’s crude flow woes. In fact, even with the production cuts, Canadian oil inventories hit an all-time high this April when they clocked in at 37.1 million barrels according to data from energy industry information firm Genscape. This was reflected by the whopping $20.62 billion in profits that Canadian oil producers missed out on this past year, or around one percent of the nation’s entire gross domestic product for 2018, according to calculations by conservative think tank the Fraser Institute.

This severe shortage of pipeline infrastructure in Canada has not only led to maxed-out pipeline capacity, it has also filled storage facilities to capacity. While this storage shortage may just seem like even more grim news on top of all the other challenges Canadian oil markets are facing, Reuters is reporting that there is a major silver lining to the crude storage story. “Upheavals in the Canadian crude market are providing unique opportunities for firms with sizeable long-term leases on Alberta storage tanks,” write Reuters’ Nia Williams and Devika Krishna Kumar a cluster that sources say includes Mercuria Energy Group and oil major BP Plc’s trading arm.” Related: OPEC’s Struggle To Avoid $40 Oil

Reuters reports that the golden opportunity for traders lies in the step of bringing crude oil from the field to the market known as “apportionment”. This is the moment when “demand to ship crude on certain pipelines exceeds capacity, forcing pipeline operators to ration the number of barrels each shipper can move. The practice is a long-standing source of frustration for Canadian producers but offers a lucrative, though risky, play for traders able to swoop in and capitalize on post-apportionment price volatility.”

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Right now, apportionment is extremely high across Canada, but it is especially exaggerated on the trans-national Enbridge Mainline network, Canada’s primary pipeline running to the United States, which transports 2.85 million barrels of oil per day.

“Traders with access to space in tanks can snap up cheap barrels, store them for a month, and sell them on at the start of the next trade cycle when prices are typically stronger” reports Reuters. Exactly which traders and how many barrels at what cost? Hard to say. Traders involved in this sector of the Canadian oil industry have been markedly tight-lipped, with major storage leaders like Mercuria and British Petroleum declining to comment on the matter. Storage rates are also hard to come by, as they are not public and are highly variable. Related: BP: Petrochemicals Drive U.S. Oil Demand Boom

While we don’t have exact figures, we can say for certain that storage leasing in Canada is at a premium, with some sources reporting to Reuters that “a four-year deal in Canada costs about $1.50 a barrel a month compared to 30-40 cents per barrel in the U.S. Gulf Coast”, a staggering price difference at a more-than than 150 percent markup.

This means that baking on making all that money back and then some off of apportionment is a risky business, but for some traders it’s clearly worth the potential reward. And investors have a chance to win big, as well. With no end in sight for the now years-long delays on the major pipeline projects that would potentially solve Canada’s problem, the glut will just continue to expand, and along with it, the ever-more lucrative storage trade.

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By Haley Zaremba for Oilprice.com

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