Heavy oil prices approach highest levels in 3 years
Canadian heavy oil prices could be headed to their highest levels in three years, even as pipeline operators are rationing space on their networks and more product is moving to the U.S. on railway cars.
The price for Western Canadian Select, the benchmark price for domestic crude, has improved by $10 per barrel during the past two weeks, reaching $49.19 per barrel Monday, which has provided a relief for domestic producers.
The price recovery for WCS comes after a difficult month of December for Canadian producers, when Canadian prices crashed as West Texas Intermediate oil prices rose sharply.
Now, the outlook for WCS is improving regardless of whether WTI prices rise. “Even if West Texas goes sideways, you’re going to see improved WCS prices,” GMP FirstEnergy analyst Martin King said at a forecast event Tuesday, adding the discount for WCS relative to WTI is shrinking.
The difference between the two prices reached US$28 per barrel in December because of a spill on TransCanada Corp.’s Keystone pipeline in South Dakota, which caused the line to shut down and resulted in a buildup of oil stored in Alberta. Currently, the difference between WCS and WTI is just under US$25 per barrel.
“If we do see $6 to $7 improvements, then these would be the highest prices we’ve seen in the last two to three years,” King said.
The spill on Keystone exacerbated a pipeline shortage for Canadian oil companies, as midstream companies had already begun apportioning space on export pipelines. It also caused Canadian oil producers to scramble and secure railway cars to send their oil to refineries in the U.S.
Oil producers are moving about 300,000 barrels of oil per day by rail, Canadian Energy Research Institute vice-president Dinara Millington said. “That’s not anywhere close to what the ultimate capacity of the terminals is,” Millington said, but noted that more Canadian oil will be exported on railway cars over the course of the next two years before new pipelines are added.
King said oil-by-rail terminals in Alberta can move 670,000 bpd while terminals in Saskatchewan can move 310,000 bpd. He said it’s likely those terminals will be operating close to full capacity by the time new pipelines — such as Kinder Morgan Canada’s Trans Mountain expansion or Enbridge Inc.’s Line 3 — are complete in 2020.
While producers struggle to find space on pipelines, a new report from AltaCorp Capital shows there have also been bottlenecks preventing producers from ramping up oil-by-rail movements.
“Anecdotal reports suggest that the demand for rail transportation hit bottlenecks of its own as congestion on CN Rail’s network have resulted in shipper having to store their loaded railcars in order to help alleviate some of the pressure at pinch points,” AltaCorp analysts said Monday.
They predicted railways would work to reduce those pinch points in the first half of this year, allowing more Canadian oil to move to U.S. refineries and leading to a further reduction in the WCS/ WTI price differential to US$17 per barrel.