It’s been said every cloud has a silver lining. In Alberta’s case, billowing clouds of black smoke are hiding a golden one..That’s because the fires are altering North American supply and demand fundamentals in such a way that the ‘differential’ — or the discount — between Alberta’s Western Canadian Select (WCS) and North American benchmark price for West Texas Intermediate (WTI) has narrowed by more than half. .“Everyone is looking at the weather,” a Calgary-based trader told Reuters in commenting on the possibility of further disruptions. .To date producers have shut in more than 300,000 barrels per day (bpd) of production in response to the fires. It’s simple supply and demand..In November 2022, a barrel of WCS was $21.10 cheaper than a comparable bucket of WTI. As of May 4 — when fire season in Alberta began in earnest — that tally had shrunk to just $10.40.. WCS-WTI differentialsDiscounts for Western Canadian Select oil have narrowed by half since the start of the year. .It almost seems counterintuitive to think that even as oil prices fell — from almost $93 in November of last year to $71.27 as of yesterday — the relative value of Canadian oil has almost doubled. Which means even though producers are getting less for their product — yesterday WCS closed at $55.97 — it’s actually worth more..That’s because Canadian producers hedge those differentials as opposed to the absolute price of the crude. Because Canadian oil is priced in US dollars but sold in Canadian currency, they can play those arbitrages to their advantage. A lower loonie, conversely, also increases the value of those barrels..According to Martin King, an analyst with RBN Energy, a number of broader factors are at play, catalyzed by the fires. .In this country demand for heavy oil is seasonal and coincides with the summer paving season — it’s a major component of asphalt — and there’s less of it as producers shut in production..But international factors are falling into near perfect alignment, which King argues in his blog, could spell a long-term paradigm shift in global oil markets, not just North American ones..Among them, US President Joe Biden’s withdrawals from the Strategic Petroleum Reserve ended in December, removing what had been a “major competitive factor” and drag on Canadian oil prices. On Tuesday morning the US Department of Energy announced tenders for three million barrels to start refilling it, which will support crude prices..Also, Enbridge Inc.’s Line 3 replacement removed pipeline constraints and added about 375,000 barrels of capacity just as Mexico is reducing its own heavy oil exports to the US. This is not only increasing supplies in the Gulf Coast at a critical time, but also allowing Canadian barrels to be exported through US ports. Since January, Canadian heavy oil exports have tripled to more than 300,000 barrels per day (bpd) led by a surge from India. .King further noted the start-up of the TransMountain pipeline expansion — which will add another half million bpd in 2024 — will add some spice to the mix. It adds up to reduced supply for American buyers, who will inevitably be forced to buck up for Canadian crudes..“This will only serve to enhance the international exposure for WCS price-linked barrels as two coastlines, rather than just one, may have a tug-of-war over which proves to be the last buyer,” he wrote..“Before you know it, we might be discussing the price spread between WCS Hardisty and Dubai, a medium sour-crude price marker for oil cargoes into Asia. Wouldn’t that be a change?”
It’s been said every cloud has a silver lining. In Alberta’s case, billowing clouds of black smoke are hiding a golden one..That’s because the fires are altering North American supply and demand fundamentals in such a way that the ‘differential’ — or the discount — between Alberta’s Western Canadian Select (WCS) and North American benchmark price for West Texas Intermediate (WTI) has narrowed by more than half. .“Everyone is looking at the weather,” a Calgary-based trader told Reuters in commenting on the possibility of further disruptions. .To date producers have shut in more than 300,000 barrels per day (bpd) of production in response to the fires. It’s simple supply and demand..In November 2022, a barrel of WCS was $21.10 cheaper than a comparable bucket of WTI. As of May 4 — when fire season in Alberta began in earnest — that tally had shrunk to just $10.40.. WCS-WTI differentialsDiscounts for Western Canadian Select oil have narrowed by half since the start of the year. .It almost seems counterintuitive to think that even as oil prices fell — from almost $93 in November of last year to $71.27 as of yesterday — the relative value of Canadian oil has almost doubled. Which means even though producers are getting less for their product — yesterday WCS closed at $55.97 — it’s actually worth more..That’s because Canadian producers hedge those differentials as opposed to the absolute price of the crude. Because Canadian oil is priced in US dollars but sold in Canadian currency, they can play those arbitrages to their advantage. A lower loonie, conversely, also increases the value of those barrels..According to Martin King, an analyst with RBN Energy, a number of broader factors are at play, catalyzed by the fires. .In this country demand for heavy oil is seasonal and coincides with the summer paving season — it’s a major component of asphalt — and there’s less of it as producers shut in production..But international factors are falling into near perfect alignment, which King argues in his blog, could spell a long-term paradigm shift in global oil markets, not just North American ones..Among them, US President Joe Biden’s withdrawals from the Strategic Petroleum Reserve ended in December, removing what had been a “major competitive factor” and drag on Canadian oil prices. On Tuesday morning the US Department of Energy announced tenders for three million barrels to start refilling it, which will support crude prices..Also, Enbridge Inc.’s Line 3 replacement removed pipeline constraints and added about 375,000 barrels of capacity just as Mexico is reducing its own heavy oil exports to the US. This is not only increasing supplies in the Gulf Coast at a critical time, but also allowing Canadian barrels to be exported through US ports. Since January, Canadian heavy oil exports have tripled to more than 300,000 barrels per day (bpd) led by a surge from India. .King further noted the start-up of the TransMountain pipeline expansion — which will add another half million bpd in 2024 — will add some spice to the mix. It adds up to reduced supply for American buyers, who will inevitably be forced to buck up for Canadian crudes..“This will only serve to enhance the international exposure for WCS price-linked barrels as two coastlines, rather than just one, may have a tug-of-war over which proves to be the last buyer,” he wrote..“Before you know it, we might be discussing the price spread between WCS Hardisty and Dubai, a medium sour-crude price marker for oil cargoes into Asia. Wouldn’t that be a change?”
