Energy Ink

U.S. pipeline constraints weigh on Canadian crude prices

April 09, 2012

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Suddenly everyone is lowering expectations for Canadian crude oil.

Last week CIBC World Markets analyst Andrew Potter revised his Brent-West Texas intermediate (WTI) differential outlook to $10 per barrel, up from $3 previously, through to 2014.

That disconnect is likely to evaporate by late 2013, he says, with the start-up of the southern leg of TransCanada Corp.’s Keystone XL line to the Gulf Coast.

But Canadian and Bakken discounts could persist through 2014 pending completion of Enbridge Inc.’s Flanagan South project and or the full Keystone project.

The CIBC analyst sees the WTI-Western Canada Select spread averaging 24 per cent, up from 19 per cent, over the same period. Edmonton Par, the light oil marker here, will trade at an 8 per cent discount to WTI until 2014, Potter believes.

A reversed (and expanded) Seaway pipeline, slated to come online by June and late 2012, respectively, will ease congestion in the U.S. Midwest refining hub somewhat, Potter writes, “but the relief will be temporary as supply growth continues to run rampant.”

This fits with an “unprecedented shift” in crude oil flows flagged by FirstEnergy Capital analyst Martin King. His revised estimate for WCS is $82.62 per barrel, down from $95.90, for the remainder of 2012.

One reason, surprisingly, for the downgrade is U.S. pipeline constraints. Early estimates out of the Bakken point to another big year of production, King notes. The state is on track to produce an additional 100,000 to 150,000 barrels per day this year, putting it ahead of Alaska and behind only Texas as a top oil-producing region in the U.S.

“Growth of this magnitude would likely further swamp the near bursting seams on available channels for moving crude oil out of the region to Cushing and the U.S. East Coast,” King writes.

In a note to clients today, he predicts a volatile price differential (north of 20 per cent), and therefore lower price realizations for Canadian producers of heavy and light oil, will persist until new pipelines are built.

“Much will be dependent on the speed at which new pipeline projects can alter flow patterns of crude oil around the United States, as well as whether the immensely attractive refining margins being enjoyed in the Midwest will last,” he writes.

The Bakken may be a blip in the global supply picture, as Eric Reguly wrote this weekend at the Globe, but it has serious implications for Canadian producers all the same.

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