Oil-by-rail efforts derailed by Alberta oil production cuts: analyst

A commodity economist says that while the Alberta government's cuts to oil production may have helped improve the price differential, those cuts are contributing to conditions that are knocking oil-by-rail efforts off the tracks.

Scotiabank's Rory Johnston says in a new report that Canadian crude discounts have dropped to the point where shipping oil by rail is unprofitable.

The province began curtailing oil production in January to tackle a widening oil price differential.

• Alberta premier announces 8.7% oil production cut to increase prices
• Alberta eases oil production limits as prices increase

Johnston says it helped reduce it to $7 a barrel before rising this month, but he says that discount needs to hit the $15 to $20 range to make rail profitable and adds petroleum shipments slipped nearly 30 per cent before stabilizing this month.

"The curtailment has either taken initially too much oil or took it off the market too quickly," Johnston told CBC News on Thursday.

With the Alberta government's oil-by-rail program set to start rolling this summer, Johnston believes the Canadian crude differentials will need to widen further for the province to turn a profit.

"As the government eased the curtailment by 75,000 barrels, versus the initial cut of 325,000 barrels, that did help tighten the differential, and we do see inventories falling. So everything's kind of going in the right direction, it just hasn't hit that perfect equilibrium yet."

Johnston expects demand for oil-by-rail services will grow in the months ahead as inventories drop and curtailment levels ease.

• Husky CEO says Alberta's OPEC-style cuts have created 'secondary market' for oil
• First Nations say Alberta has no right to cut oil activity on their land
• The unintended consequences of Alberta's mandatory oil production cut

The province announced production cuts of 8.7 per cent in December.

"In Alberta, we believe that markets are the best way to set prices, but when markets aren't working, when companies are forced to sell our resources for pennies on the dollar, then we have a responsibility to act," Premier Rachel Notley said at the time.

Industry has been divided on the move.

Cenovus Energy is on side.

Imperial Oil is firmly against.

Husky Energy has said the cuts have led to a secondary market for oil, an "amusing" unintended consequence.

Some First Nations have asked for an exemption from the cuts and said the province doesn't have the authority to dictate production on their land.