In the past, Canadian heavy oil was all too often the sick man of the North American oil market. Plagued by a limited number of refinery outlets and numerous episodes of insufficient pipeline export capacity from Western Canada, it was often subject to far larger price discounts versus the light crude oil price benchmark of West Texas Intermediate (WTI) than was justified by quality and pipeline transportation costs alone. In the past few years, however, improved pipeline export capacity to and through the U.S. has expanded the number of refineries Canadian heavy oil can reach, and the expansion of crude oil export terminals along the Gulf Coast has resulted in greatly improved exposure for Canadian barrels to buyers in international markets. The end result has been a closer alignment of Canadian heavy oil pricing in its home base of Alberta with those in the Midwest and Gulf Coast.
The machinations of Western Canadian Select (WCS), the price benchmark for the region’s heavy oil production, remain a hot topic for the crude oil market and RBN blog readers. With more than 90% of Canada’s crude oil exports to the U.S. being heavy in nature — and typically linked to the WCS benchmark in some way — the price drivers of this closely watched price marker have affected billions of dollars in investment decisions from the production to the refining side of the business. They also generated an overt political response a few years ago in Alberta, home to the vast majority of Western Canada’s heavy oil production in the form of bitumen from the oil sands.
The key thing with the WCS price is that because of the Canadian heavy oil’s characteristics (low API, high sulfur, etc.) it would be expected to trade at a discount to benchmark lighter crude oil. In the case of WCS, this is usually expressed as a discount to WTI to factor in the additional costs associated with transporting the heavy oil to other parts of North America and processing it, as well as other extraneous factors ranging from regional inventory levels, the availability of pipeline export capacity, the price of competing heavy oil supplies, and refinery demand (or lack thereof), just to name a few. For top value to be realized, Canadian producers of heavy oil prefer a narrower price differential to WTI that more accurately reflects quality and transportation differences, rather than wider discounts where other factors beyond quality and transportation might further undercut the value of heavy oil.
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