Fort McMurray wildfire cuts production by a million barrels a day — and oil prices drop?

It's been nearly a week since Alberta's oil production began to slow as a result of the wildfire in Fort McMurray. More than a million barrels a day has been take off the market, with more being shut in on Monday, and there's no firm timeline for starting up.

So far, the oil market has largely shrugged off the effects of the disaster on supply, confident that production will come back in relatively short order.

Analysts say that may begin to change, though, as the flow of oil to U.S. refineries starts to slow and oilsands operations try to figure out how to restart with many of their workers displaced.

Oil prices down

While there has been a small increase in the price of Western Canadian oil, the two major benchmarks, Brent and West Texas Intermediate, dropped around three per cent on Monday.

OPEC Ali Al-Naimi

Oil markets are reacting this week to Ali al-Naimi, Saudi Arabia's former oil minister, who has retired from his job. (Vladimir Weiss/Bloomberg)

Events outside of Alberta were roiling the oil market, such as reports of more oil in storage in the U.S. Midwest and the retirement of Ali Al-Naimi, Saudi's longtime oil minister.

Al-Naimi was the architect of the policy that caused oil prices to fall so dramatically in late 2014, but his replacement is thought to be even more supportive of that policy, which sees market share as more important than short-term prices.

Oil from the oilsands is mostly exported to refineries in the U.S. Midwest and on the Gulf Coast. But oil moves through pipelines around eight km/h an hour, so the oil received this week in the Chicago area left Alberta in April and is going right into storage.

'Oilsands operators have a lot of expenses right now and need revenue to pay for those.' - Jackie Forrest, Arc Financial

"You produce the oil, it goes into pipelines and then it goes into inventories," said Robert Mark, an energy analyst with investment bank 3Macs.

"If you were to say we'd be short a million barrels a day for a couple of months, then it would have an impact."

Gas prices stable for now

Despite the pause in the flow of oil to the Suncor refinery in Edmonton, gasoline prices in Alberta have not moved yet. In fact, Roger McKnight, a petroleum analyst with En-Pro, expects prices to fall over the next 36 hours, but could move higher in the days to come

"Gasoline prices will go up relatively soon, I would imagine, because the key refinery hubs are the U.S. Midwest and Gulf Coast, and the U.S. Midwest uses almost exclusively Western Canadian select that comes from Alberta," said McKnight.

McKnight agrees that prices for gasoline will depend on when oilsands operations are able to start up again, but pointed out that even gasoline inventories are very high, so there is downward pressure on gas at least for the time being.

Nexen Long Lake

Nexen's Long Lake oilsands operations sustained some small damage from the wildfire. (CBC)

No timeline for startup

There has been no serious damage to any oilsands operation in the Fort McMurray area and the fire is now moving away from the city.

Suncor said that it is already preparing for startup once it is safe to do so, which will depend on the fires being extinguished or at least far enough away from oilsands operations that safety and air quality are not issues.

No one is clear when that will be, but Jackie Forrest, vice-president of energy research with ARC Financial, said that once the fires are out, it won't take long to get production back.

Forrest said that last year fires in Cold Lake, Alta., caused some facilities to shut down, and within two days of the all-clear, the plants were up and running.

"This may be a little different because the scale is a lot larger," said Forrest. "But I do think that you will see startups fairly quickly because there is a fair amount of motivation to get those operations back on line."

"Oilsands operators have a lot of expenses right now and need revenue to pay for those."

The human element

Nearly 90 per cent of Fort McMurray's structures remain intact, but Alberta's Premier Rachel Notley said that it will be at least two weeks before people will be able to return to the city safely.

"The real issue here for the oilsands is that we don't know the answer to is how functional will the city of Fort McMurray be," said Mark.

"There could be real challenges as to the ability of people to live there, and the human element is such a core part of these operations.

"If they can't live their lives, can't get back into their homes, it's going to be much more difficult for the Suncors of the world to start their operations."

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