Canadian Oil Stocks Falter Amid Uncertainty of Threat From Venezuela's Oil

By Robb M. Stewart

Canadian oil stocks were under pressure Monday after the U.S. capture of Venezuela's president suggested a future headwind for the industry and lower crude prices, even as it strengthens the case for a new export pipeline.

Shares of energy companies were down in late morning trading on the Toronto Stock Exchange, holding back a broad advance for the market that was led by mining and financial stocks as investors reacted to U.S. military strikes on Venezuela and the arrest of President Nicolas Maduro.

Cenovus Energy was among the hardest hit, falling 8% to C$22.13. Canadian Natural Resources and Baytex Energy were each down more than 7%, while Suncor Energy lost 4% and Imperial Oil dropped 4.8%.

The ouster of Maduro has increased speculation Washington will use Venezuelan oil to reduce or displace the dependence of U.S. refineries on Canadian oil imports. Analysts say any efforts to revive Venezuela's energy infrastructure and tapping its vast resources would need hefty investment, though nearer term any move to free up oil exports from Venezuela would add to global supplies and weigh on already soft prices.

Analysts at Morgan Stanley estimate the near-term impact on oil production is likely limited, beyond the relatively small number of barrels lost in recent weeks due to the U.S. blockade targeting shipments of Venezuelan crude.

Still, they say Venezuela's mainly heavy sour crude is similar in quality to a Western Canadian Select barrel. When the Biden administration from 2022 to 2023 allowed for the resumption of some Venezuelan oil imports it contributed to a wider discount on Canadian oil prices relative to benchmark West Texas Intermediate, they said.

Morgan Stanley said Imperial Oil and Cenovus are likely among the most exposed to changes in the WCS-WTI spread, while Suncor and Canadian Natural are more insulated.

It likely would be difficult for the U.S. to displace the use of Canadian crude in the short term, said Charles St-Arnaud, chief economist at Servus Credit Union.

"Geography also favors Canada. Most of Canada's oil is used by refineries in the U.S. Midwest, accounting for about 69% of total Canadian oil exports," St-Arnaud said. "This usage will be difficult to replace, as all the major oil pipelines have oil flowing from the Midwest towards the Gulf Coast."

He added the usage of Canadian oil on the U.S. west coast is mostly at refineries in Washington state that benefit from direct access to Canadian crude via a branch in the TransMountain pipeline system. The cost of sending tankers from Venezuela to the Pacific Northwest reduces the likelihood of substitution, he said.

Still, analysts said the uncertainty in Venezuela, and the risks that creates for global trade, strengthens the argument that Canada needs to diversify its export markets and lessen its reliance on the U.S.

Randy Ollenberger, an analyst at Bank of Montreal Capital Markets, said the implications of a revitalized Venezuelan energy industry is negative longer-term for both oil prices and the price for Canadian heavy oil differentials. That strengthens the case for an oil export pipeline to Canada's west coast, he said.

Write to Robb M. Stewart at [e-mail]

(END) Dow Jones Newswires

01-05-26 1204ET