Canadian heavy oil price gap tops $30 a barrel, widest gap since 2018
A barrel of North American benchmark oil is changing hands for around US$90 a barrel right now, but heavy crude that comes from Canada’s tar sands costs $30 less due to a perfect storm of imbalances between the ‘Offer and demand.
The blend of oil known as West Texas Intermediate (WTI) was selling for around $87 a barrel on Thursday. That’s down from recent highs, but still well above the price offered for each barrel of crude oil from Canada’s tar sands, a type of thick, tarry, « sour » crude that goes by the name Western Canada. Select (WCS).
WCS was trading just over US$53 a barrel on Thursday, the cheapest level since Russian President Vladimir Putin invaded Ukraine, pushing oil prices to their highest level in years on fear of a larger war, and caused countries to scramble to replace sanctioned Russian Brut.
It’s also more than $34 a barrel cheaper than WTI, which is the biggest gap between the two blends since 2018.
Western Canada Select almost always sells at a discount to WTI because only a relatively small number of refineries are able to process it. It is generally considered to be of lower quality due to its high sulfur content, which makes it a « sour » mixture, compared to a « milder » mixture such as WTI. This means that refineries have to be sized a certain way just to process it, which drives the price of WCS down to offset that extra cost.
Then there is the cost of shipping from northern Alberta to refineries in the United States, which even under ideal circumstances adds another $5-10 discount to the price of each barrel. The price of oil is in US dollars because, like many commodities, including gold, the market is international.
Pipelines aren’t to blame this time
The ability of tight pipelines is normally to blame whenever the gap between the two oil mixes is as wide as it is now, but experts say that is not the case this time around.
Instead, there are fewer buyers for WCS as several refineries that process it are currently offline. And there is a decline in demand for oil overall due to fears of a coming recession.
Add it all up and it’s a perfect storm of reasons why the price of Canadian oil has fallen, said Vijay Muralidharan, Principal, R Cube Economic Consulting Inc. expands,” he told CBC. News in an interview.
Fall is usually the season when refineries shut down for maintenance, but there are still more refineries than normal offline right now, due to unplanned shutdowns. A 160,000-barrel-a-day refinery in Toledo, Ohio, was shut down due to a fire in August, and although it reopened last month, it has yet to return to full capacity.
An even larger one in Whiting, Indiana, near Chicago, normally handles 430,000 barrels of oil a day, but it was also knocked out of service by a fire, and has yet to return to normal.
« A lot of Canadian heavy crude is going to this refinery and if it blows up, it’s a big blow to WCS, » Muralidharan said. So Canadian crude that would normally be refined somewhere around Chicago has to travel farther to be processed.
Mississippi barges exacerbate the problem
Some of it would normally travel by river, but that route is also part of the problem right now due to abnormally low water levels on the Mississippi River, said Rory Johnston, founder of the Commodity Context newsletter.
“They usually carry a bunch of these products [but] Mississippi is very dry, so there are concerns about bottlenecks and shipping there as well,” he said in an interview.
At least half a dozen barges on the Mississippi ran aground last week, according to the US Coast Guard, leading to shipping delays and fears others could become stranded. One of the results of this bottleneck is that refineries that rely on the river to bring in crude and ship products temporarily lose their appetite for Canadian oil.
« The low Mississippi appears to be weighing on WCS prices, given the supply disruptions it is causing, » oil analyst Matt Smith of Kpler told CBC News in an email. « Refineries apparently have to cut back because they are unable to move product. »
This decline in demand for Canadian crude is spreading from Chicago to every link in the complex oil supply chain.
“We actually see the weakness extending to the US Gulf Coast,” Johnston said.
There is more than enough pipeline capacity to get oil where it needs to go right now. But even once those barrels of WCS arrive at the many refineries on America’s Gulf Coast, they then face their next problem: The Biden administration has released millions of barrels of the country’s strategic petroleum reserve. , in order to compensate for the tumult caused. by Putin’s invasion.
These WCS barrels are hanging around the same refining center as these American barrels, trying to find a buyer. And all that gross starts to pile up. Data from Wednesday’s EIA showed the total number of barrels of oil stored in the United States increased by nearly 10 million barrels last week.
This means that demand is falling, which is a general sign that the economy is slowing down – which means that oil prices will face a surge even under ideal circumstances.
« The good news here is that it doesn’t appear to be related to insufficient pipeline capacity for Canadian oil. The bad news is that it’s something that’s almost entirely out of our control right now, » Johnston said.
« It doesn’t seem to be improving yet. So there is an open question about how serious the situation is. »