WCS discount hits record high, as Alberta pleads with Ottawa to take corrective action

WCS discount hits record high, as Alberta pleads with Ottawa to take corrective action

The discount on Canada's heavy oil benchmark widened to a record US$47 a barrel this week, bringing the price of Western Canadian Select (WCS) to a multi-year low of about US$19.50 on Tuesday. 

The sharp decline in prices is being blamed on low demand from refineries in the Midwest, the largest buyers of Canadian crude. Midwest refineries were operating at just 70% of capacity in mid-October due to a very busy maintenance turnaround season in the region.

NOT JUST A HEAVY OIL PROBLEM

The discount for Canadian Light also widened to US$28 this week, up from just over US$5 in early August. Edmonton Condensate (C5+), which normally trades on par or even at a slight premium to WTI, is also more than US$10 below the US benchmark.

NO EASY FIX

Shifting focus away from the Trans Mountain Expansion project, Alberta Premium Rachel Notley is calling on Ottawa to boost crude by rail capacity. Both CN and CP Rail reported a big jump in crude oil transport volumes this past quarter. CP Rail is expecting volumes to top 200,000 bbl/day in 2019, while competitor CN Rail says they can probably hit 250,000 bbl/day next year. According to government estimates, crude-by-rail exports to the US are expected to reach about 300,000 bbl/day by the end of this year and 400,000 bbl/day at the end of 2019, up from about 200,000 bbl/day this past summer.

However, it's unclear what Ottawa can do to boost rail transport in the short term. Both CN and CP Rail are also working on expanding crude volumes, signing longer term contracts with Alberta's producers. Alberta's rail loading capacity is limited, but already undergoing significant expansion. Rail tracks are fixed infrastructure, shared with thousands of tons of cargo and other commodities every day.  Crude can only be transported on jacketed tank cars, which are owned by the producers and in limited supply. Most importantly, the rail operators and oil companies are all publicly traded corporations, accountable to their respective shareholders.

PROBLEM LIKELY TO GET WORSE, BEFORE IT GETS BETTER

According to the US Energy Information Administration (EIA), utilization rates in the Midwest improved to 74% last week, but US imports of Canadian crude still remains about 400,000 bbl/day below normal. 

The US imported about 3.6 million bbl/day of Canadian crude this past spring, but imports have hovered around 3.2 million bbl/day in October.

The last time WCS traded below US$20/bbl was at the beginning of 2016, when West Texas Intermediate (WTI) was priced closer to US$30.

If there's a small glimmer of hope, it can be found in the WCS futures contracts. Although the near-month contract (December) is showing a US$47 discount, that number drops sharply going forward, falling below US$30 a barrel by next spring. May not be much, but at least the data would suggests this latest price crunch won't last forever.

Netbacks at Fort Hills remain challenged, but still positive (barely)

Netbacks at Fort Hills remain challenged, but still positive (barely)

Crude by rail on pace to shatter records in 2019

Crude by rail on pace to shatter records in 2019

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