Oil prices around the world have risen to their highest levels in years, but Canadian oil sands producers are seeing relatively less for each barrel due to supply and demand imbalances.
The reference price for North American oil, a blend of crude known as West Texas Intermediate or WTI, changed hands Tuesday at $119 a barrel — short of the multi-year record $120.99 following the invasion of the United States. Russian President Vladimir Putin in Ukraine in February brought the market into turmoil.
WTI is what is known as a “light, sweet” blend, so named because it is less dense than “heavy” oils and contains much less sulfur than others considered “sour”. Those chemical properties make it easier and cheaper to refine, store and ship, which is why WTI has become the prized measure of oil prices.
But there are countless other blends, including the type of oil that comes from Alberta’s oil sands, a heavy and acidic blend known as Western Canada Select or WCS. Oilsands crude from Canada is almost always traded at a discount to blends like WTI because it has to be diluted before shipping, and there are transportation problems getting it out of landlocked Alberta and into pipelines or railroad cars on the way. to refineries on the US Gulf coast.
Typically, that discount is around $10-$15 US per barrel, but recent events have pushed the difference to over $20. That’s the largest since November, and close to the $24 spread seen in the very early days of COVID-19 when oil prices plummeted.
That means that even if WTI flirts with $120 a barrel, Canadian oil sands producers still get only $99 for their product.
There are a few reasons why, but they all come down to one fundamental economic rule: supply and demand.
Different oil blends require refineries to be calibrated differently to process them, and many refineries are not set up to handle heavy blends like WCS. During the pandemic, production of many heavy blends slowed to a crawl, inadvertently helping to secure buyers for WCS.
“WCS has really benefited from the reduced availability of Mexican heavy crude and Venezuelan crude for a long time,” said Rory Johnston, founder of Commodity Context, the oil market data service. “All the other heavy crudes in the region they traditionally competed against were gone, so WCS was almost the only competition in town.”
But that is no longer the case. Production of a heavy Mexican blend known as Mayan crude is on the rise, as are medium blends from offshore platforms like Mars and Poseidon.
As a result, refiners using these heavy mixes are not short on supply, so they can afford to be more picky about what to pay for it and who to buy it from.
“You have more options, so you don’t take as much as you’re used to,” is how Bloomberg Intelligence energy analyst Fernando Valle describes the mindset of US heavy crude refineries right now.
This slowdown in demand comes against the background of an uptick in supply from Alberta. May is typically a slower month for oil production in Canada’s oil field, as the changing weather results in what Valle calls a “melt-off.”
“It’s hard to move oil rigs because the ground is thawing, so there’s usually a decrease,” he said in an interview. That is why many facilities are voluntarily or involuntarily closed each spring, but early indications are that production will recover strongly this summer. And all that excess Canadian oil is already starting to pile up.
Canadian oil inventories are already at their highest levels since 2019, and are set to rise this month, according to Bloomberg data. Against the backdrop of that oversupply and lower demand, a widening price gap for Canadian oil makes perfect sense.
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“Stocks in Hardisty, Alberta, are fuller than stocks in Cushing,” Valle said, referring to the Cushing, Oklahoma oil hub, the U.S. energy industry’s central transportation hub, through which just about every barrel of oil flows. at one time or another.
“That’s ultimately what that differential tells you.”
Biden Plan Will Release Even More Barrels
That imbalance could get worse before it gets better, because of a plan announced earlier this year by the Biden administration to… release millions of barrels of crude oil from the Strategic Petroleum Reserve to offset the uproar caused by Putin’s invasion.
Nearly 40 million barrels of crude oil will be put on the market from July 1. the US Department of Energy said last month:and the crude oil mixture released is acidic, making it similar to the type of oil the oil sands offer — and it will all be released near the US Gulf Coast refinery cluster that Canadian producers also sell to.
That planned release is more than 10 times what Canada’s oil sands produce on a typical day, so a market flooded with so much sour crude is likely to drive the price of Canadian products down even more.
“That stuff from Alberta is still shipped there,” Johnston said. “They’re just going to have to discount it more to sell.”