Western Canadian producers regularly have to swallow large price discounts for heavy crude versus the US benchmark West Texas Intermediate (WTI). During the first week of November price discounts for heavy Western Canadian Select crude versus WTI came close to $42/Bbl – the deepest since 2007. Since then they have narrowed but are still over $30/Bbl. Today we examine the relationship between storage volumes in Alberta and crude price discounts.
This is Part 2 of our series on Canadian crude oil storage. In Part 1 we looked at increasing Canadian crude oil production and expanding pipeline capacity in the two crude marketing hubs of Edmonton and Hardisty. The two hubs are the staging posts for crude oil exports to the US as well as the distribution point for diluent supplies coming into the oil sands production region. Today we turn our attention to the relationship between Canadian crude pricing, congestion on the crude pipelines leaving Edmonton and Hardisty, and storage inventory.
The chart below shows the price discount between oil sands benchmark Western Canadian Select (WCS) crude priced at Hardisty and the US benchmark West Texas Intermediate (WTI) at Cushing OK. On November 5, 2013 the WCS discount to WTI at Cushing reached close to $42/Bbl – its widest level since 2007. The WCS discount has averaged $23/Bbl over the past two years and $24/Bbl so far this year. The two crudes have different qualities – WCS is a heavy sour crude blend made with diluent (see It’s a Bitumen Oil – Does it Go Too Far?) and WTI is a light sweet crude that is less complicated to refine and therefore more valuable. But the WCS price discounts to WTI experienced at Hardisty are far wider than the quality differential warrants. In fact the discounts have been mainly caused by congestion on the pipeline systems out of Canada to the US or further downstream in the US Midwest from Chicago to Cushing, OK. The congestion requires Canadian producers to compete for pipeline capacity to ship their crudes to US refiners and as a result they have frequently had to accept heavily discounted prices.
Source: CME Data from Morningstar (Click to Enlarge)
The pipeline congestion primarily results from insufficient pipeline capacity being available to carry Canadian production looking to reach US market destinations. This lack of capacity compared to shipper nominations results in pipeline operators apportioning the space made available to committed shippers – cutting their nominated volumes by a percentage to accommodate everyone. At times the congestion gets worse (as it did in early November) when pipeline operators perform maintenance that restricts capacity further. For example, Enbridge – the operator of the 2.5 MMb/d mainline from Edmonton to Superior, WS apportioned the “Line 4” pipeline on the system in November by 13 percent. The congestion on pipelines out of Canada has been further exacerbated by growing volumes of North Dakota Bakken crude production vying for the same routes to reach markets in the Midwest and ultimately the Gulf Coast. Delays in the permitting and approval of new pipeline projects to increase capacity between Canada and the US such as the Keystone XL pipeline have added insult to injury.
Continued congestion on the pipelines out of Canada leaves producers little option but to take the discounted prices on offer or to put their crude into storage at Edmonton or Hardisty in the hope of better prices in the future. In the past year a third option has developed that is just now becoming feasible as operators complete infrastructure build out – and that is using crude-by-rail transport to bypass the congestion.
And so, in response to the demand from crude producers looking to hold their supplies in Canada until US prices improve, significant storage capacity has been built out in Hardisty and Edmonton and continues to expand. There is no official data that we are aware of on the actual storage capacity in tanks at Hardisty and Edmonton. However, the best commercial information available comes from our friends at Genscape who maintain a weekly database of the storage levels at both Hardisty and Edmonton. Genscape estimate total current crude storage capacity at Edmonton to be around 12.5 MMBbl in above ground tanks. Storage capacity at Hardisty is currently 18.6 MMBbl in above ground tanks plus 3 MMBbl of underground salt cavern storage owned by Enbridge.