Canadian oil nets top price in Gulf — but very little of it gets there
A handful of oilsands producers benefit with pipeline, rail capacity to ship to U.S.
While most Canadian oil is being sold at a huge discount to U.S. benchmarks, barrels that get to the prized Gulf Coast market are securing international prices — even selling at a premium on some days.
A barrel of Western Canada Select at the oil price hub of Hardisty, Alta., traded for US$19.49 on Wednesday for December delivery.
But the same barrel of heavy Canadian oil is fetching US$64.74 in Houston, near the West Texas Intermediate benchmark price of US$66.44, AltaCorp Capital analyst Nicholas Lupick said.
“We’re not even talking about a different barrel,” Lupick said, explaining that the WCS Canadian blend is trading at two different prices depending on whether it’s sold in Alberta or Texas.
Lupick analyzed daily trading data for months and found some Canadian oil companies fortunate enough to move their barrels to the U.S. Gulf Coast are able to realize prices similar to heavy oil blends from Mexico, Venezuela and elsewhere — which have been trading at or above the price of WTI.
On Oct. 9, for example, Mexico’s Maya crude was trading at US$77.17 per barrel, above WTI’s $74.96.
Lupick believes a handful of Canadian oilsands producers such as MEG Energy and Cenovus are capturing global prices on a portion of their production as they have publicly stated they have pipeline or rail capacity to ship to the U.S. Gulf Coast.
Still, it’s difficult to know which producers are getting discounted prices and which are earning a premium, as companies treat pipeline, trading and refinery contracts as commercially sensitive information, said Kevin Birn, vice-president, North American crude oil markets at IHS Markit.
As much as 2.64 million barrels per day of Canadian oil reached the less lucrative Midwest refiners on average in the first seven months of the year, but only around 458,000 per day were headed for the Gulf Coast, according to the U.S. Department of Energy.
“If you can physically move it on some sort of take-or-pay arrangement, the price you’d be able to get is that price in the other market less the transportation cost to move it there,” Birn said, referring to the price dislocation between Alberta and Texas.
“The problem is, not everybody has that (transportation arrangement).”
The fall in heavy oil production elsewhere and the oilsands transportation woes could lay the ground for a multi-year bull market for the blend, according to analysts.
Precipitous declines in heavy oil from places like Venezuela, Mexico and Iran, combined with OPEC cuts to heavy oil production have led to a faster-than-expected drop in heavy oil availability in Texas and Louisiana — an area with the world’s largest concentration of heavy oil refineries.
“In a world that is now flush with oil, the availability of light oil has gone up, but the availability of heavy has contracted,” Birn said.
As the only heavy oil-producing country to be increasing production, Canada is well-positioned to capture that bull market, although it’s held back by insufficient pipeline infrastructure.
“The largest near-term fix for this is more railroad,” ARC Energy Research Institute executive director Peter Tertzakian said. Canadian oil-by-rail exports hit a record 229,541 barrels per day in August, according to the National Energy Board, and analysts expect those figures to reach 300,000 bpd by the end of the year.
Tertzakian expects rail will continue to be in use until TransCanada Corp. completes its Keystone XL pipeline, which would move an additional 830,000 bpd from Alberta to Texas, bringing price relief to Canadian producers.
“This is the right grade of oil and, if it could get to market, it could get a premium over time,” Auspice Capital founder and chief investment officer Tim Pickering said of Canadian heavy crude.