Alberta heavy oil price up almost 80% since March

The price of heavy oil from Canada's oilsands has quietly rebounded by 77 per cent in the past six weeks, far better than the comeback in other types of crude.

Price of Western Canada Select has risen by much more than other types of oil

Two workers clamp down a drill pipe at an oilsands site in Northern Alberta. After cratering since the fall, the price of Canada's heavy oil blend has rebounded much better than other types of oil of late. (Norm Betts/Bloomberg News)

The price of heavy oil from Canada's oilsands has quietly rebounded by 77 per cent in the past six weeks, far better than the comeback in other types of crude.

Most of the oil that Canada produces is called Western Canada Select, the benchmark blend of thicker, tarry bitumen-based crude oil that comes mostly from Alberta's oilsands. The price of WCS has stormed back from $29.71 a barrel on March 17, to $52.63 on May 6. That's an increase of more than 77 per cent in a little over 30 trading days.

What's more, it is almost twice as much as the surge seen in the North American benchmark WTI — West Texas Intermediate — over the same time period. And it's almost three times as much as the price surge seen in Brent, which is the type of oil that's the benchmark just about everywhere else in the world.

Complex issue

Why? The answer is a complex mix of factors including more pipeline capacity, increased rail shipments and some seasonality. 

But the main one is that certain investments made by the oil industry several years ago when Canadian oil was undervalued are starting to pay dividends.

At certain points following the end of the recession in 2009, heavy oil from Canada traded at a discount of as much as $40 per barrel compared to WTI. That's because, despite being a major source of crude, Canada has very little refining capacity. So the vast majority of Canadian oil is exported to U.S. refineries for processing.

For many years, Canadian heavy oil had to accept a lower price because it was more expensive for those refineries to process.

But over the years refineries spent billions to make themselves better able to process heavier oil, and now the price gap has narrowed from $40 a few years ago to under $10 today with WCS changing hands at just over $51 a barrel on Monday, not much less than the $59 spot price for WTI.

More pipelines too

Another factor in the rise of WCS is the many new pipelines, which have made it easier to get Canadian oil to U.S. refineries quickly and efficiently.

Thanks to these new pipelines, past bottlenecks have been washed away, and the situation is closer to a free market.

In addition to new pipelines, many older ones have been upgraded in order to be able to pump oil in multiple directions. That makes it easier to keep the supply and demand of crude in check.

Gasoline analyst Michael Ervin says he thinks the surge in WCS prices "is strongly linked to the increased export capacity afforded by the recent [late December] opening of the Flanagan South pipeline, which can take WCS crude from Enbridge's Canadian 'Alberta Clipper' mainline, and get it to Cushing, Oklahoma."

Cushing is often considered North America's oil hub, so getting your product there is the key to selling it on the global market.

Meanwhile, all those alternative routes to market are adding up. Pipeline company Enbridge last month said its system is moving about 300,000 more barrels of oil per day this quarter than it did in the same time last year, and that this is at a time when prices have cratered.

"The pipelines have provided more export capacity, and that's been helpful to pricing" is how oil analyst Jackie Forrest, with ARC Financial in Calgary, put it in an interview with CBC News.

TD Bank agrees with that assessment, saying in a recent research note: "Although there are likely several drivers of this relative outperformance, we contend that the overall market access for Canadian heavies continues to improve."

Crude by rail

On top of pipelines, there's a lot more oil moving by rail than there used to be, too. 

The National Energy Board says on average 173,342 barrels of oil were shipped by rail in Canada in the last three months of 2014. That's almost as much as the amount of crude-by-rail shipped in all of 2012. By next year, that figure is forecast to jump to 600,000.

All those new ways of bringing oil to market are just another reason why there's increased appetite for Canada's heavy oil.

There's also some seasonality at play. Put simply, oil prices tend to increase in the lead-up to the busy summer driving season, and decline in the colder winter months.

That's happening this year, too. But there's driving-related demand for heavy Canadian oil even outside actual gas pumps.

"Spring is generally considered a period of seasonal strength for heavy oil" as the summer paving season tends to boost asphalt demand, TD Bank pointed out in a recent research note.

Now what?

While there's lots of valid reasons for Canadian's heavy oil rebound, the billion dollar question is whether it will last.

When you consider factors like quality differences and transportation costs, heavy Canadian oil should be about $15 less than lighter WTI, Forrest says.

Right now the gap is under $10, which is unlikely to last, she says. But thanks to the new transportation systems and refinery upgrades, the days of massive price gaps are also likely a thing of the past.

"But there's going to be some choppiness," she said. "It'll be a see-saw recovery — as prices keep rising, it's likely we see some U.S. producers increase their supply, which will frustrate the price recovery."

Still, as Todd Hirsch, an economist with ATB Financial put it, "Even with the increase we're still in a weak price environment but it does reassure people that those doomsday scenarios in January seem less likely."


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