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Andrew Bell

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Canadian oil and gas stocks rallied for a second day following Alberta's decision to invest in the Keystone XL pipeline but analysts and portfolio managers said even slightly positive news can cause dramatic moves in markets.

"Oil is up only modestly, but small changes in sentiment have a huge impact on share prices at these low levels," Raymond James analyst Chris Cox said in an email.

Positive tidings for the industry include a plan by the Alberta government to invest US$1.1 billion in the Keystone XL pipeline, intended to increase the southbound flow of Alberta crude and reduce backlogs of oil stuck in the province. The pipeline's builder, TC Energy Corp., confirmed plans to proceed with the project.

The benchmark West Texas Intermediate oil was about 37 cents higher Tuesday mid-afternoon to trade around US$20.55 after U.S. President Donald Trump and Russian President Vladimir Putin agreed to discuss stabilizing energy markets, which are swamped with crude.

Meanwhile, Dean Orrico, president and chief investment officer of fund manager Middlefield Group, said algorithmic traders are magnifying moves in energy shares. When the group is up he said, these traders buy them to try to cash in on momentum but they also sell them fast when the sector turns down. This means they're "driving prices higher when they're moving up and vice versa," he said in an email.

The iShares S&P/TSX Capped Energy Index ETF traded at $3.85, up more than 14 per cent this afternoon. It was way down from almost $10 in January but up nearly 40 per cent from a low of $2.77 on March 18.

Despite today's rally, reeling energy markets have some Alberta producers facing the prospect of actually having to pay to have their crude taken away as storage space runs out.

"It's not just possible for pricing to go negative, it's likely, in our view," Raymond James's Cox said in a report Tuesday.

He said in an email that Canadian heavy oil is at most risk of negative pricing "but if the situation deteriorates further, it is conceivable that light oil could even go negative."

TD analyst Menno Hulshof said in a report that discounts on Canadian oil generally have widened over the past week, with heavy crude slipping to about US$16 per barrel below WTI from around US$10.

But "this is not just a heavy issue," the analyst added. "We have seen similar moves in the Edmonton Light differential (about US$9 per barrel up from US$3) and synthetic crude oil differential (a discount of about US$12 versus a premium of about US$3)."

A core problem is a slide in demand by refineries in the U.S. Midwest, a vital market for Alberta's heavy oil, as the virus outbreak keeps millions of people at home. Raymond James warns there has yet to be "a material decline" in refinery activity in the industry's reported figures, meaning that worse may yet be ahead for Western Canadian oil producers.

Alberta's benchmark heavy grade, Western Canadian Select, hit record lows yesterday, changing hands below US$4 barrel. It traded around US$4.09 Tuesday.

"I think negative regional prices here (and elsewhere in landlocked production jurisdictions) are very possible, potentially inevitable,"  Peter Tertzakian, executive director of the ARC Energy Institute, said in an email.

"Negative prices won’t last too long.  But it’s the loud signal needed to force producers to shut in ASAP."

Alberta non-upgraded bitumen production could be cut by "a few hundred thousand barrels per day" in the coming weeks, as prices languish, Stifel analyst Michael Dunn said in a report released on Monday. Non-upgraded bitumen output in Alberta was about 1.5 million barrels per day in 2019.

Dunn said oil companies can't simply halt their giant oil sands operations because they would risk damage to their assets. Steam-assisted gravity drainage operations can be harmed while offline and "exposed bitumen ore at the mine face can become refuse if exposed to air for too long."

The industry does have experience with forced production cuts, for example, the current curtailments mandated by Alberta and shutdowns during the 2016 Fort McMurray wildfires. Stifel's Dunn says those reductions were mostly achieved by way of “rolling blackouts” across different assets "but more than a few weeks of zero production from wells would pose a significant concern for the wells’ productivity after restarting."

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