Back to the Future – What happened to Bakken and Canadian Crude Prices?

“Prices have dropped to the lowest level in years.  Pipelines are overbooked, and supplies are backing up.  There is just not enough capacity to get out of the supply area and into the market area.  Pipeline capacity is at a premium.  The last time prices got to this level, producers shut in.”

Natural gas in the Rockies a few years back?  It certainly could be.  But noooooo.  It is crude oil today.  In Canada and in the Bakken.    Bakken crude oil is more than $22/bbl cheaper than WTI.  The differential was $11 a week ago, and $4-5 in early January.  These changes happen fast.  According to Reuters, Western Canada Select was running at $31.25 a barrel under WTI yesterday, actually up $4.25 versus Monday (explained below).  This crude was only $18/bbl under WTI a couple of weeks back. 

And to add insult to injury, the Brent-WTI differential has widened back out. From $20 over the past couple of days, narrowing slightly yesterday (also explained below).

There are several things happening at the same time responsible for all of this chaos.  First, the story that was so familiar to the Canadian and Rockies gas markets.  There is too much of the stuff and we can’t get it out.  North Dakota kicked out a release in January saying “Bakken Blend crude production in the state averaged more than half a million bpd, marking a new record. Crude production averaged nearly 510,000 bpd in November, up about 22,000 b/d from October and more than 150,000 b/d more than November 2010. ….500,000 bpd of crude represents about 10% of U.S. production.” 

On the Canadian side, we talked about some of this a couple of weeks ago in a RBN Markets posting - A Home for Canadian Oil Sands Crude?  Canadian oil sands production is ramping up.  Volume from the Athabasca Oil Sands Project in Q4 increased 30% over the previous year to about 200,000 b/d.  

And in the midst of the increasing supply, (a) BP’s big refinery in Whiting, Indiana (largest U.S. consumer of Syncrude) is has a major unit outage, (b) capacity on the Enbridge pipeline system is maxed out, (c) rail capacity is having issues (see Ridin’ the Bakken Slow Rail), and (d) the Seaway reversal (to move 150,000 b/d from Cushing to the Gulf Coast eventually getting to 400,000 b/d) has been delayed until June.  Damn.  Damn!  Where is that pipeline?

As these things usually happen, all the factors converged and the differentials shifted almost overnight.  The graphic below is indicative what has happened to the Bakken crude oil differential.

This whole market looks like the perfect storm.  And it sounds eerily familiar to Rockies natural gas traders backed up in that market in 2007-08, looking at prices of $.01/mmbtu.  Yes, I do mean one penny. Simultaneous maintenance on a couple of pipelines in June 2007 contributed to one of the first major price shocks of that fiasco.

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