MISSING OUT ON OIL’S PRICE REBOUND
Keystone outage worsens discount on Canadian crude, Geoffrey Morgan writes.
Crude oil prices are at a two-year high, but out-of-luck Canadian producers are missing out on the rebound.
The West Texas Intermediate benchmark oil price rose again Thursday to US$58.25 per barrel, marking the second day that North American oil prices had traded over US$58 since the summer of 2015.
But the discount on Canadian oil has only worsened after TransCanada Corp. shut down its Keystone mainline after an oil spill late last week, choking off a vital conduit connecting Alberta to American refineries. The pipeline, built 10 years ago, carries 590,000 barrels of oil per day from Alberta to an important hub in Oklahoma.
TransCanada discovered a 5,000-barrel leak days before regulators in Nebraska approved Keystone XL on Monday — a new pipeline that would expand the existing Keystone system.
The shutdown is pushing differentials between Canadian and American benchmarks wider on worries about a glut of crude building up in Alberta. The Canadian heavy oil benchmark was trading at US$17.25 discount to the U.S. crude benchmark Thursday — its widest since August 2015, according to Bloomberg data. The average differential between the two benchmarks this year has stood at around US$11.70.
“The change in the differential is largely attributed to the Keystone pipeline being temporarily shut down,” AltaCorp Capital analysts said in a research note this week.
As a result, major oil companies in Calgary have been forced to put more production into storage tanks, or find alternative ways to ship their crude.
Tudor, Pickering and Holt analysts said in a Monday research note the pipeline’s outage creates “potential for weakness in fourth quarter oilsands realizations,” and listed MEG Energy Corp., Imperial Oil Ltd. and Cenovus Energy Inc. among the companies that would be most affected by the outage.
Cenovus spokesperson Sonja Franklin said in an email the company is “still assessing the impact of the Keystone outage, and while we don’t comment on our day-to-day marketing activities, we continue to use our logistics and transportation system to mitigate the impact.”
Cenovus owns an oil-by-rail loading facility that it can use to send more of its barrels to market in times of pipeline restrictions.
Suncor Energy Inc., the country’s largest oilsands producer by market cap, said it has enough access to oil storage tanks to temporarily store the barrels it would have sent on Keystone.
“Obviously, we’re shipping on it so if it’s out for a long period of time, we will see an effect. But based on the information that we have today, we don’t think that we’ll be affected at all,” Mark Little, Suncor Energy Inc. president, upstream, told the Calgary Herald this week.
Imperial and MEG did not respond to requests for comment. Canadian Natural Resources Ltd. declined to comment.
TransCanada is in the middle of a cleanup effort in South Dakota but does not yet have a return-to-service date for the pipeline, spokesperson Matthew John said in an emailed statement. Shipments on the pipeline are down 85 per cent, oil traders told Bloomberg.
TransCanada shares fell 0.13 per cent at close on Thursday to $62.91, extending dips the stock incurred over the previous two days. Rival Enbridge Inc. ended the day up 1.11 per cent to $47.53 after traders reported apportionment on its heavy oil lines rose to 21 per cent in December from five per cent in November.
Independent reports predict widely divergent dates for the restart of Keystone, with Thomson Reuters reporting end of the month as the likely date. A report from Stream Asset Management, a Calgary-based private equity company, suggested Keystone could be shut for longer given that regulators in South Dakota have signalled they want to ensure another leak won’t happen.
“We think the regulator is likely to take more time on this restart, especially given the Keystone name and last year’s Standing Rock protests that delayed the Dakota Access Pipeline,” Stream’s chief market strategist Dan Tsubouchi said in a note.
Scotiabank analyst Michael Loewen said the spread between WCS and WTI could widen to more than US$20 per barrel if regulators in South Dakota delays TransCanada from restarting the pipeline for more than two weeks.
While it’s unclear how long Keystone will be out, the discount on Canadian heavy crude is likely to fall again once the line is back in operations, Auspice Capital founder and chief investment officer Tim Pickering said.
“I don’t think it’ll stay there that long because if I look over the last three years, the incremental demand for the Canadian barrel is fantastic. We have more U.S. refineries tooled for heavy sour and we’ve got this insatiable Asian appetite for it as well,” Pickering said.
Pickering also said that while discounts for Canadian oil have become more severe over the last month, Canadian crude oil prices have risen about 35 per cent since bottoming in June, compared with a roughly 30 per cent increase for WTI prices.
We have more U.S. refineries tooled for heavy sour and we’ve got this insatiable Asian appetite for it as well.