Pipeline bottlenecks push Canadian oil price to deepest discount in 4 years
Canadian oil selling for just $30 a barrel, even as West Texas Intermediate nears twice that price
The price gap between the price of Canada's oil benchmark versus its U.S. equivalent, West Texas Intermediate, has widened to its biggest difference in almost four years, with Canadian crude now selling at a $25 discount.
The heavy oil coming out of Alberta's oilsands is known Western Canada Select. It usually trades at a discount to the better known U.S. benchmark, West Texas Intermediate, in part because it is more difficult to process.
But this week, the gap expanded to more than $25 US a barrel, due to transport bottlenecks on pipelines and by rail.
Most Canadian oil is shipped down to refineries on the U.S. Gulf Coast to be refined into usable products like gasoline, diesel and jet fuel. That means Canadian producers have to compete with U.S. shale oil companies, who also sell to those same refineries and don't have nearly the same level of transportation headaches to deal with.
TransCanada's Keystone pipeline was shut for several weeks after a spill last month, and rival Enbridge said this week it plans to ration its capacity on a key oil pipeline between Edmonton and Wisconsin by one fifth this month.
At the same time, shipments of crude by rail are inching higher, but are still lower than they were several years ago.
The transportation bottlenecks are putting the squeeze on Canadian oil. "We have a lot of oil in the oilsands," said Conor Bill, managing director of Mount Auburn Capital Corp., "and the problem is there aren't a lot of ways to get that crude out of the area where it's produced."
The supply imbalance is especially vexing considering the price of WTI has been on a run lately, ever since an OPEC deal last month to maintain production cuts. The WTI price is up by 33 per cent since June, and a barrel of U.S. oil was changing hands at $56.81 on Wednesday.
Contrast that with a barrel of Western Canada Select, which can be had for just $31.72 US on Wednesday. That's a gap of $25 a barrel — the widest seen since 2013, before the price of oil collapsed.
"Producers with access to international markets are earning higher receipts," said Shane Thomson, a foreign exchange trader with Cambridge Global Solutions. "The Canadian economy is not seeing the full benefit of the increase in global prices."
Instead of higher prices, Canadian producers are having to cut their prices to get their product to market. "You need to cut the price in order to incur the costs to ship it out of there," Bill told the CBC's On The Money on Tuesday.
<a href="https://twitter.com/conorbill?ref_src=twsrc%5Etfw">@ConorBill</a> gives us his take on the climate change summit, the transportation bottleneck that Canada's crude is facing, and the alternative cryptocurrencies called litecoin and ether that are getting a boost from the bitcoin excitement. <a href="https://t.co/x9oTxPICDM">pic.twitter.com/x9oTxPICDM</a>—@OnTheMoneyCBC
The price gap could stick around a while longer, since transportation issues show no signs of easing any time soon.
"It will continue," Bill said.