Demand for Canadian heavy crude is soaring

'Structural change' in markets said to support long term export plans

November 10, 2011

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A “structural change” in Canadian heavy oil markets supports long-term export plans that would deliver increased oil sands production for processing in the United States, a fall report from Peters & Co. says. The Calgary brokerage predicts the spread between the value of low and high crude oil grades – known as the “differential” – will remain narrow, climbing no higher than 20 per cent by 2016.

The reason is higher demand for heavier Canadian crude oil in the U.S. Midwest and in the refining corridor on the U.S. Gulf Coast, where TransCanada Corp. hopes to deliver 700,000 barrels of crude per day along its highly anticipated – and controversial – Keystone XL pipeline expansion.

“Import volumes of Canadian heavy crudes into these markets have increased over the past few years, largely due to the additional pipeline takeaway and spare coking capacity,” Peters says. “As a result, aside from periodic fluctuations in the light-heavy differential, we believe that a narrower differential will prevail over the medium term.”

Upgraders live off the difference between prices for their raw material – bitumen – and their output of synthetic crude oil. Proposals to build the behemoth plants proliferated in 2005-06, when the differential peaked near 45 per cent. The blueprints were abruptly shelved, however, when the financial incentive disappeared at the onset of the 2008-09 economic contraction, during which the price gap plunged to 12 per cent.

Although they are highly subject to market conditions, Peters expects light-heavy differentials to stay in the 19- to 22-per cent range through 2016, in part because expected additions of new pipelines will enhance Alberta producers’ ability to shop around for the best available prices.

On the U.S. Gulf Coast, a historic discount leveled against Canadian heavy crude relative to its Mexican and Arab counterparts – averaging US$10.07 per barrel and US$11.58 per barrel, respectively, over the last three years – could tighten “significantly” as Mexican imports to the U.S. dwindle, and are ultimately replaced, by deliveries of Canadian heavy oil, Peters says.

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