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We're Here for a Good Time, Part 2 - What's Driving the Wider WCS/WTI Price Spreads?

You would expect the start-up of Enbridge’s Line 3 Replacement project early this fall to have eased the constraints on crude oil pipelines from Western Canada to the U.S. — and it did. You’d also expect that L3R coming online would narrow the price spread between Western Canadian Select and West Texas intermediate — but it didn’t. The latest widening of the WCS-WTI spread, one of many in recent years, is another reminder that oil price differentials can be affected by many factors other than pipeline capacity availability. In today’s RBN blog, we discuss the host of issues that affect this all-important Canadian oil price metric.

Over the past two decades, Canadian crude oil producers and shippers have often found themselves short of pipeline capacity to transport rising production to the U.S., their primary export market. These episodes typically resulted in deeper price discounts for Western Canadian Select (WCS) and other crude oil streams out of Canada versus West Texas Intermediate (WTI).

The solution would seem to be simple: Add more pipeline export capacity to reduce or eliminate the periods of deeper WCS price discounts. Building out new pipeline capacity has proven to be an immense regulatory and legal challenge over the years, but expansions have still occurred, with the latest addition being an upgrade to part of the existing Enbridge Mainline network, a series of crude oil pipelines that link Alberta to refiners in the U.S. Midwest, as well as important refiner destinations in Eastern Canada.

That upgrade — the Line 3 Replacement (L3R) project, which was discussed in Part 1 — involved the replacement of nearly all 1,100 miles of the original Line 3 pipeline to increase its capacity from a previously pressure-restricted 390 Mb/d back to its originally intended 760 Mb/d. After working its way through a multi-year legal and regulatory quagmire, Enbridge finally brought the L3R project into service on October 1. The L3R start-up increased available pipeline export capacity out of Canada to a level higher than existing production, seemingly solving the WCS price discount problem, at least for the time being. However, as we noted near the end of Part 1, the price of WCS actually trended to a deeper discount versus WTI after the L3R project had begun operations and was already transporting light and heavy crude oil to the Midwest and Eastern Canada.

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