Advertisement 1

CME to launch Edmonton Sweet as producers seek to dodge price discounts

The Chicago Mercantile Exchange will launch the contract for Edmonton Sweet Dec. 15, allowing oil companies to lock-in prices for future production

Article content

CALGARY – CME Group Inc. is preparing to launch a new futures contract for Alberta’s light oil, spurred by demand from small producers eager to avoid price discounts created by pipeline constraints.

The Chicago Mercantile Exchange’s owner will launch the contract for Edmonton Sweet Dec. 15, Calgary broker Net Energy Inc. said, allowing oil companies to lock-in prices for future production as soaring output from Alberta’s oil sands and North Dakota’s Bakken play contribute to chronic pipeline jams.

Advertisement 2
Story continues below
Article content

“There’s quite a bit of demand to hedge that exposure with the growing production, both in the Bakken area and in Alberta,” said Dan Brusstar, senior director, energy research and product development with CME. “This is a way they can hedge that even as all the pipeline constraints and the rail constraints get worked out.”

Article content

Light oil output in Western Canada is growing at a slower clip compared to rival shale deposits in the United States, where horizontal drilling and hydraulic fracturing techniques are poised to vault the U.S. past Russia and Saudi Arabia as the world’s top producer of hydrocarbons.

In Alberta, production from so-called conventional zones rose 14% in 2012 from a year earlier to 556,000 barrels a day, according to government statistics. Output is expected to increase another seven per cent this year, the province’s energy regulator says.

The renaissance in light oil is adding to supply pressures in Western Canada, where bitumen production from the oil sands is expected to double in coming decades, from about 1.9 million barrels a day today.

Companies have turned to rail shipments and boosted financial hedges to mitigate discounts on Alberta’s heavy oil blend, Western Canada Select. The extra-thick crude has fetched up to US$40 less than benchmark West Texas Intermediate oil in recent weeks thanks to pipeline congestion and refinery outages.

Advertisement 3
Story continues below
Article content

Oil sands producer Cenovus Energy Inc., for example, said it has roughly 15,400 barrels a day of expected heavy crude output for 2014 hedged at an average WCS discount to WTI of US$20.39.

Now light oil is feeling the pinch. Crescent Point Energy Corp., which produces oil in Saskatchewan’s Bakken and Lower Shaunavon plays, said Nov. 7 the gap between the oil it sells and the main North American benchmark price narrowed in the three months ended Sept. 30.

But the spread, or differential, averaged $12.69 per barrel in the quarter, compared to $13.04 in the same period a year earlier, the company said. It expects price differentials to remain volatile next year.

So much oil is flowing from the North Dakota prairie that some of it has increasingly found its way north into the Enbridge Inc. mainline system, exacerbating pressure on Canadian producers.

In recent months, the Calgary-based pipeline giant has repeatedly rationed space on the two-million-barrel-a-day network to complete maintenance and because orders to move crude exceed capacity.

Enbridge has proposed a series of expansions to the system, which carries the bulk of Canadian crude to U.S. markets.

But there will continue to be “some choppiness” on the network pending the start-up of BP’s Whiting conversion in Indiana, the Citgo Petroleum Corp. plant near Chicago and Enbridge’s own Flanagan South pipeline expansion, said Steve Wuori, Enbridge’s president of liquids pipelines.

Mr. Brusstar said the ability to lock-in oil prices gives banks and independent producers of Alberta and Bakken oil a way to manage those disruptions.

“There’s been a demand for this,” he said. “I think it’s been growing for quite a while.”

Financial Post

jlewis@nationalpost.com

Article content
Comments
You must be logged in to join the discussion or read more comments.
Join the Conversation

Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.

This Week in Flyers