What the Proposed U.S. Budget Means for Canadian Oil Producers

A number of reports have been circulating of late with respect to the new proposed U.S. budget, with much of the analysis focused on where the spending will be focused over the coming years, and which services will be cut to fund this increased spending.

What I’m going to discuss in this article is one of the proposed ways the U.S. is planning to fund its spending plan: cutting the U.S. Strategic Petroleum Reserve in half.

That’s right – half of the American oil reserves are intended to be put back into the market over the next 10 years, according to the latest budget proposal. The U.S. spending plan is very capital intensive, and while selling a significant portion of the oil reserves will likely help increase revenue in the short-term, over the medium to long-term, it appears oil prices will be under continued downward pressure as 50% of the current U.S. Strategic Petroleum Reserve accounts for more than the entire supply glut of oil in the market over and above five-year levels (344 million barrels of oil compared to a glut of approximately 300 million over and above the five-year average today).

Many Canadian oil sands producers have been working to cut costs to maintain profitability in this low-price commodity environment, however, many of these producers still have production costs between $30-$40 per barrel of oil, due to the nature of the crude extracted from oil sands. Alberta’s crude extracted from the oil sands deposits (Western Select) is also sold at a discount to WTI or Brent Crude, a discount which has traditionally hovered between approximately 20%-25%.

Right now may simply not be the right time to bet on Canadian oil producers.