While oil prices are surging, Canadian crude is getting cheaper

And this time it’s not due to pipeline traffic jams

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Western Canadian heavy crude is getting less expensive once again relative to the North American criteria West Texas Intermediate (WTI), however it’s not for the normal pipeline-related factors.

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The differential in between Western Canadian Select (WCS), Canada’s main heavy sour export crude mix, and WTI just recently increased to a pandemic-era high of US$21 per barrel after more than a year of tight spreads and relative stability. The WCS was trading at US$60.43 Thursday early morning in contrast to the U.S. criteria, which stood at US$80.79.

Nevertheless, WCS hasn’t just gotten less expensive in Alberta: it’s getting less expensive at the other end of the pipelines — in Oklahoma and at the U.S. Gulf Coast too — which shows a more comprehensive quality-related headwind that we’re seeing throughout worldwide unrefined differentials. This indicated quality differential has actually expanded from about US$4 per barrel to more than US$10 per barrel over current months while the indicated transport differential has actually stayed relatively consistent at around US$7 per barrel.

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Anatomy of a petroleum differential

Unpredictable and squashing differentials have actually pestered the Western Canadian oil market for much of the previous years. The relative worth of WCS, like that of all crudes, is driven by a mixed drink of elements connected to the chemical cosmetics and geographical area of the barrel.

In short:

Quality : Various grades of unrefined differ extensively throughout several characteristics, however the 2 primary elements are the oil’s “gravity” or density (i.e., light, medium, or heavy) and its sulphur concentration (i.e., sweet or sour). Lighter barrels generally command a premium due to the fact that they yield a greater percentage of better petroleum items, like gas, with cheaper refining methods. Sweet barrels are likewise generally chosen considering that lots of jurisdictions need that the majority of a crude’s sulphur material is eliminated prior to reaching customers (due to the fact that sulphur is nasty; see: acid rain, breathing damage, and so on.). WCS is a particularly heavy, sour crude, which indicates that it will often deserve less than a light, sweet barrel like WTI. That relative worth of WCS shifts in time along with schedule of and need for various grades.

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Location : All oil is priced at a particular area due to the fact that carrying or keeping crude is pricey and complex. WCS is priced at an oil tank terminal in Hardisty, Alta. and WTI is priced almost 2,200 kilometres away in Cushing, Okla., with the U.S. Gulf Coast refining center another 800 kilometres even more down the line (see map). This geographical truth, combined with inadequate pipeline capability, has actually been the standard source of distress for Western Canadian oil manufacturers.

Over the previous years, whenever production in the Western Canadian Sedimentary Basin (WCSB) surpassed offered takeaway capability, an excess of crude would get caught on the Alberta end of the pipelines. This would just be solved when the regional rates were adequately depressed such that the distinction in between the rate in Hardisty and the wanted location might cover the greater expense of incremental transportation (generally, rail).

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This cycle was most acutely felt in October 2018 when the WCS differential expanded to an extraordinary US$50 per barrel, which eventually triggered the provincial federal government to momentarily cut domestic production to lower competitors for takeaway capability.

Heavy is the Crude that Uses the Discount Rate

So, what’s occurring today? Provided the still-fresh discomfort of the severe 2018 differential blowouts, an expanding WCS differential harkens restored pipeline concerns.

Nevertheless, this time WCS’ marketing battles have a lot more to do with quality than location, as evidenced by the synchronised and comparable widening of the WCS differential significant in Cushing in addition to the U.S. Gulf Coast.

Certainly, the indicated transport differential has actually stayed practically completely steady through this newest bout of expanding at around US$7 per barrel (see map, “implied transportation”). The quality discounting issue seen today is larger — more worldwide and more complex — than the anticipated Canadian crude transport story.

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We’re seeing comparable expanding patterns throughout other local and worldwide unrefined differentials. At the greatest level, the differential in between Brent, the light sweet worldwide criteria, and Dubai, the medium sour criteria utilized throughout the majority of Asia, just recently expanded to an 8-year high of more than US$5 per barrel. Better to house, medium sour crudes like Mars and Poseidon at the U.S. Gulf Coast have actually likewise sold relative to their lighter, sweeter equivalents over the previous couple of weeks.

This heavy crude weakening is being driven by a range of elements.

Initially, we’re seeing strong Canadian production and the start-up of Line 3, Canada’s very first brand-new[ish] pipeline in ages, which helps with much more heavy unrefined inflows. At a worldwide level, the return of kept, primarily much heavier OPEC+ production increases the schedule of these heavy crudes, while crisis-level gas rates rise the expenses associated with refining much heavier barrels. This is intensified on a regional level as U.S. Gulf Coast refineries continue to have a hard time to recuperate after Cyclone Ida-related shutdowns, with offshore platforms pumping much heavier grades rebooting quicker.

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Now you have more heavy crude offered than the refining market wishes to procedure — a minimum of at narrow differentials. I likewise keep in mind that some market gamers have actually declared easy seasonal weak point as refiners change up their item mix; nevertheless, this seasonal weak point hasn’t actually been seen over the previous 2 years.

The most recent bout of WCS differential widening is quite a great news/bad newspaper article for Canadian oil manufacturers.

Fortunately: This (lastly) isn’t a pipeline or Canada-specific issue. Additionally, quality differential widening has much less space to run compared to almost-ceilingless transportation-related discounting.

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The problem: there’s absolutely nothing actually to be done about the widening from a Canadian market point of view and it appears to mark completion of a temporary pandemic goldilocks duration for heavy unrefined differentials.

In lots of methods, the current weak point of WCS, and heavy crudes more broadly, is yet another post-pandemic go back to “normal”: WCS’ indicated quality differential invested the majority of the pandemic at an unusually narrow US$2-4 per barrel versus the pre-2020 standard of nearer US$5-8 per barrel, though we’ve now overshot that standard which indicates we’re most likely to slowly tighten up once again as markets stabilize.

Rory Johnston is the creator of Product Context and handling director and market economic expert at Toronto-based Rate Street Inc. You can register for his newsletter here: https://commoditycontext.substack.com/

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Jobber Wiki author Frank Long contributed to this report.