Deep discounts for Canadian oil won’t last, FirstEnergy says
It’s baaack. Or is it? Steep price discounts leveled against Canadian crude oil relative to West Texas intermediate in recent days have injected fresh life into a bet on differentials.
In a note this morning, FirstEnergy Capital analysts Martin King and Steven Paget predict Western Canada Select (the primary heavy oil marker here) could be trading at a US$30 discount relative to WTI by March.
But while the yawning split between WTI and its international counterpart, North Sea Brent, was driven last year by pipeline capacity constraints (that was the catalyst cited by traders, anyway, who turned the spread into the year’s biggest bet), the emerging gap between WTI and Canadian light and heavy crude oil markers is not entirely related to transportation issues, FirstEnergy says.
“We do not see the recent widening of price spreads as being an issue surrounding lack of transportation capacity on Canadian crude oil export pipelines,” King and Paget write.
Instead, they attribute the divergence to a series of short-term issues including refinery outages, and a resulting logjam of crude built up in the U.S. Midwest region. The commissioning of the highly anticipated Seaway pipeline reversal has also been pushed back from April to June.
Another factor: a “mind-boggling” increase in production of light oil from the Bakken formation in North Dakota. Daily output from the region exited 2011 north of 500,000 barrels. FirstEnergy expects another 100,000 to 150,000 barrels to add to the daily total before the end of the year.
All that oil, including new volumes from Colorado’s Niobrara play, continues to make its way south and east, via barge, trucks, rail cars and pipeline, competing with Canadian output. (Incidentally, TransCanada’s scotched Keystone XL pipeline had contracted to move at least 65,000 barrels daily from North Dakota to the U.S. Gulf Coast).
Meanwhile, more than 400,000 barrels per day of refining capacity is estimated to come offline in coming weeks. Maintenance issues, including a partial outage last week at BP’s Whiting refinery, the largest consumer of Canadian synthetic barrels in the U.S., according to King and Paget, combined with rumored difficulties at Cenovus Energy’s Wood River plant, have only added to the strain.
King and Paget do not think the growing spread between WTI and WCS, which gaped to US$35.50 yesterday, is here to stay. Barrel-on-barrel competition in the U.S. Midwest will subside, they believe, once refinery upgrades are completed, new rail takeaway capacity materializes and the Seaway reversal comes online. “Just like flying,” the analysts write, “this bumpy turbulence will also pass.”