China snapping up cheap Canadian oil, lured by $50 discount over U.S. crude
Chinese oil buyers are making a beeline for a bargain across the Pacific.
With Canadian oil over 60 per cent cheaper than U.S. benchmark West Texas Intermediate and global marker Brent, China’s refiners are being lured to the heavy and sludgy crude. That’s because, apart from being a source of fuel, it’s also rich in bitumen — a black residue used to build everything from roads to runways and roofs.
China’s demand for the material is expected to increase as President Xi Jinping’s government focuses on infrastructure construction in a bid to reform the world’s second-biggest economy. With the availability of other bitumen-yielding oil varieties such as Venezuela’s Merey shrinking, the Asian nation’s refiners are turning to alternative supplies to feed the building boom at home.
One of their options is Canadian crude, prices for which are tumbling as rising production runs into pipeline bottlenecks and maintenance work cuts refinery capacity at regular buyers in the U.S. Midwest. In the rest of the world, oil is surging as impending American sanctions squeeze Iranian exports and an economic crisis hits Venezuelan shipments. Fears are rising that OPEC will struggle to ease a looming supply crunch.
“The policy of boosting infrastructure investment has been bullish for bitumen,” said Li Haining, an analyst with industry consultant SCI99 in China’s Shandong province. “The supply of the Merey grade has been disrupted since May, pushing refiners to look elsewhere. As late- September and October is traditionally the peak season for construction projects in China, demand will be further supported.”
China bought 1.58 million barrels of Canadian crude for loading in September, almost 50 per cent higher than the 1.05 million barrels in April, data from cargo-tracking and intelligence company Kpler show. State-run refiner CNOOC Ltd. has chartered a tanker, Nordtulip, to load oil from Vancouver in October, according to shipping fixtures.
With Chinese infrastructure spending in the second half of 2018 seen accelerating at five times the pace in the first six months of the year, expectations that bitumen demand will increase have boosted prices of the material to a record in the nation. That means refiners producing the residue from relatively cheap Canadian oil would enjoy better profit margins.
The heavy Western Canadian Select crude grade’s discount to U.S. WTI expanded to US$50 early on Wednesday, according to market participants. The absolute price of WCS was at about US$26 a barrel, compared with US$83 for global benchmark Brent crude.