Earlier this month, the price discount for Western Canadian Select (WCS) versus WTI at Cushing blew out to more than $30/bbl — 2.5x what’s typical and a signal that something was seriously out of whack. Well, it turns out that several things were — and to some degree still are — off-kilter, combining to drive down the price of Western Canada’s benchmark heavy-oil blend to its lowest levels relative to WTI in four years. The culprits? Everything from renewed pipeline constraints to a deadly refinery fire in Ohio to the aftereffects of Russia’s invasion of Ukraine, including releases from the U.S.’s Strategic Petroleum Reserve (SPR). In today’s RBN blog, we discuss the recent ups and downs in WCS pricing and the prospects for WCS-WTI differentials to return to a more normal range in the weeks to come. (Hint: This roller-coaster ride ain’t over.)
Even with Western Canada’s extraordinary hydrocarbon reserves, it seems it’s never a walk in the park for producers of conventional oil and bitumen there. As production in the Alberta oil sands in particular grew quickly through the 2010s, the pipelines that transport most of that supply south to U.S. markets filled up. That forced some midstream companies to apportion access to their pipelines and prompted many producers and shippers to turn to more expensive crude-by-rail as an alternative delivery method. Pipeline constraints and increased use of rail crushed prices for WCS and other regional blends — by the fall of 2018, the spread between WCS at Hardisty and WTI prices had ballooned to more than $40/bbl (dashed navy oval in Figure 1). In January 2019, Alberta’s provincial government implemented a production cap to ease takeaway constraints and shrink the WCS-WTI price spread. The differential did return to earth (within a few bucks of $12/bbl) and as it did, production curtailments were eased through the remainder of 2019 and into 2020 (dashed green oval). Of course, just as it seemed that things were normalizing, along came a once-in-a-century pandemic, sharply reducing demand for oil and spurring nearly 1 MMb/d in production cuts in Western Canada as a whole — the vast majority of them occurring in Alberta. The only good news was that as production fell, pipeline constraints evaporated and crude-by-rail volumes dropped to their lowest level in years.
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