Canadian heavy oil trading at ‘outrageous’ $40 discount
Canadian oil producers are missing out on a recent rally in global oil prices as the discount for domestic crude flirts with all-time highs in recent weeks.
“It has been ridiculous — it’s been outrageous, actually,” said Martin King, director of institutional research at GMP FirstEnergy, about the near-record discounts facing Canadian crude oil production.
The spike can be attributed to Canada’s full oil export pipelines, combined with a slow uptake in crude-oil-by rail shipments and, recently, production outages at two important U.S. refineries. While the West Texas Intermediate benchmark has steadily climbed over US$71.89 per barrel — drawing the ire of U.S. President Donald Trump, who blamed OPEC for high prices — the main Canadian oil benchmark has at times traded for less than half that price. King said Western Canada Select, a blend of heavy oil barrels, was trading at a discount of US$34.50 per barrel at mid-day on Wednesday, or roughly half of WTI prices. Some WCS contracts have traded at a US$40per barrel discount to WTI but King says those were small trades of high-sour, heavy barrels, which traditionally trade at a discount to the lighter WTI oil benchmark. “It may be not quite a record, but it’s pretty damn close,” he said, referring to the all-time high set on Nov. 5, 2013, when WCS traded at a US$42-per-barrel discount. Rory Johnston, commodity analyst at Scotiabank, said in a report Wednesday that brokers in Calgary are talking about Canadian heavy oil futures trading hands at all-time high discounts of more than US$40 per barrel under WTI in late September. “While pipeline bottlenecks are most visible in Western Canadian Select heavy oil discounts, Canadian light crude benchmarks like mixed sweet and synthetic crude are also seeing differentials to U.S. crudes rise ...,” the report noted. BP Plc’s Whiting refinery in Indiana and Marathon Petroleum Corp.’s Detroit refinery, two of heavy Canadian oil’s key clients, have been offline. Scotiabank expects differentials to return to the normal US$18-$22 as those two refineries wrap up their maintenance programs next month, and oilby-rail traffic picks up the slack over the remainder of 2018.