I Go to Extremes - The Non-Canadian Factors Behind the Latest Widening of the WCS-WTI Price Spread

Western Canada’s heavy oil producers have become all too familiar with fluctuating and often very wide price discounts for their product. Too often, the culprits have been insufficient pipeline export capacity and/or rapidly rising production. It might be easy to quickly dismiss the latest widening of the heavy oil price discount as being related to these well-known factors, but it turns out that other more international trends are at work, ranging from U.S. government-backed competition in the Gulf Coast to heavy discounting of competing barrels in other far-flung regions of the world. In today’s RBN blog, we look beyond the borders of Canada for an explanation of the latest pressures driving wider Canadian heavy oil price discounts.

With a large majority of Canada’s crude export volumes to the U.S. being in the form of heavy oil, it is only natural for the industry to track the relative price of those barrels versus major price benchmarks such as West Texas Intermediate (WTI). The most closely watched Canadian heavy oil price marker is Western Canadian Select (WCS) and its price differential to WTI, which often yields clues on the degree to which market forces are discounting WCS barrels.

Simply put, when the supply of WCS is greater than the market desires, it will be more discounted relative to WTI, and when the supply of WCS is less than what the market wants, it will be less discounted relative to WTI. Aside from the amount of heavy oil production, numerous other factors such as inventory levels, pipeline constraints and refinery availability play a role in determining the level of the price discount. (Some discounting of WCS is normal to cover quality differences and transportation costs.) With more than 2.5 MMb/d of heavy oil exported to the U.S., a deeper discount for WCS can quickly add up to many millions of dollars per day of lost revenue for Canadian producers.

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