The devastating wildfires in western Canada has shut-in a lot of the oil from the Canadian oil sands. While there has been a lot of structural devastation in Fort McMurray and other areas, fortunately loss of life and serious injury has been very limited in relation to the size and the speed of the massive wildfires. In the last week companies like ConocoPhillips (NYSE:COP) have been moving workers back into the camps to restart oil sands production.
It is estimated that over 10% of the structures in Fort McMurray, the main oil sands support city, were destroyed by the fire. Most of the actual oil sands themselves received limited to no damage. But electrical transmission lines, some smaller towns in northern Alberta, and other forms of support received some damage. It will take a while before all of the oil sand facilities can return to full operating capacity, even though most of them should start limited production in the next couple of weeks.
The first tangible impacts of the loss of Canadian oil supply showed up in yesterdays weekly EIA oil storage report. According to the report, for the week of May 13 to May 20, oil imports fell 362 thousand barrels a day from the previous week. Total oil in storage fell 4.2 million barrels from the previous week. A shortage of Canadian oil imports can be expected for at least the next several weeks.
Yesterday's report was the first week where the U.S. felt the loss of Canadian oil even though the fires went out of control in early May. That is because oil only travels through a pipeline at 3 to 5 miles per hour. On average oil moves 100 miles per day through a pipeline. The oil shut-in in early May only started not arriving at U.S. markets in mid-May. Next weeks report may show even less oil will be imported from Canada. That is because the U.S. markets for the oil sands are one to two thousand miles away. The oil takes two to three weeks to travel to its intended destination. Even if all of the oil sands production was back online on June 1, it would still be mid-June before the oil reached the refineries.
Below is a look at the destinations for oil from Alberta, Canada:
As can be seen, oil from the oil sands is shipped to Asia and to the east coast of Canada and the U.S.. But most of it is shipped to Midwestern hubs and to Cushing, Oklahoma, which is the main hub for West Texas Intermediate crude oil. Since the fires started, the price of West Texas Intermediate has risen several dollars per barrel to $50. Storage capacity in all of western Canada is only 62 million barrels, so Canadian storage cannot mask the entire shortfall from the oil sands.
Oil stored at Cushing is relatively speaking at a much higher level than normal when compared to the oil stored in the Midwest and on the east coast. Here the markets have reacted to the loss of oil from the oil sands more dramatically. Prices are being bid up as reflected at the hub located in Clearbrook, Minnesota. There prices recently traded at a rare premium to West Texas Intermediate.
Oil produced in the Bakken flows to many of the same markets as the oil produced in the Canadian oil sands. This is giving a much needed temporary price boost to oil producers in the region. Many publicly traded companies are deeply in debt relative to their cash flow and should be sold. For example, this article explains why investors should use any rise in Whiting Petroleum (NYSE:WLL) to lighten up. Instead, investors should consider low debt oil companies like Matador Resources (NYSE:MTDR), as explained in this article. Matador was one of five low debt oil stocks investors were alerted to over a year ago in this article.
It is only a matter of time before the oil markets see supply and demand rebalance because of the dramatic fall in the worldwide rig count. However, the oil shortages from the Canadian oil sands are temporary and investors should use this opportunity to upgrade from higher debt oil stocks to lower debt oil stocks.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.