Alberta's oil storage levels — so high last year the province initiated mandatory production cuts — fell to their lowest levels in nearly two years in July, according to a U.S.-based energy data group.

Genscape's estimates of crude inventories in Western Canada totalled roughly 27.7 million barrels for week ending July 26. That's the lowest level since November, 2017.

The declines came amid a busy month for crude-by-rail shipments.

Monthly Canadian rail loadings averaged 248,000 barrels per day in July, up 18,000 bpd from June. It was the highest monthly average since January, Genscape said.

"Inventories continued declining in July amid relatively high crude-by-rail loadings," analyst Dylan White said in an email.

"With Canada-to-U.S. pipelines operating at or near capacity, markets remained dependent on rail shipments to move excess barrels to downstream markets."

If inventories continue to be drawn down, it would be good news for an industry that's being dealing with a glut of crude oil since last fall, due in part to rising production and a lack of pipeline capacity.

But White cautioned continued storage reductions will depend on rail volumes persisting at a relatively high rate.

"If rail volumes decrease in the coming months, inventories could decline at a slower rate, or even resume a building pattern," White said.

Rail volumes could decrease if the economics of shipping by rail change.

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Genscape noted crude-by-rail loadings at the end of the January "plummeted" after Alberta's oil production cuts saw the price of Western Canadian Select (WCS) oil soar. When the gap between WCS and West Texas Intermediate — the U.S. benchmark — narrowed to less than $10, crude by rail became uneconomic for many shippers.

Rory Johnston, a commodity economist at Scotiabank, said the industry needs to see oil inventories to continue to fall, but that will require an even wider price differential than the market has seen recently.

"As of today, the WCS discount is sitting at around $12.50 a barrel, which is well below the bare minimum of $15-a-barrel discount you need for oil-by-rail to break even," Johnston said.

"And we need that differential to be even wider because we don't just need oil-by-rail to break even. We need it to actually provide a profit incentive to get rail companies and oil companies to invest these hundreds of millions of dollars that are needed in new tank cars, new locomotives and train new crews.

Genscape's July estimates come as the province weighs an oil industry idea that the government consider easing its oil curtailment program levels for producers who add crude-by-rail capacity.

Suncor CEO Mark Little said during the company's second-quarter call with analysts that although his company doesn't traditionally move much crude oil by rail, it would likely add capacity if it can get relief from provincial quotas.

It's an idea that's also found support from Cenovus Energy CEO Alex Pourbaix, who has called the proposal a "win-win-win situation" for the province, the producers and Alberta taxpayers.

Cenovus rail shipments rose to 36,000 barrels per day in June, up from an average of 16,000 bpd in the first quarter, putting the company on track to reach 100,000 bpd by year-end.

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