CANADIAN LIGHT CRUDE PRICES EXPECTED TO FALL.
Canadian light crude prices are expected to take a beating as the U.S. shale phenomenon eats into its market share, according to an analyst.
Unlike Canadian heavy oil, Canadian light sweet crude has weathered the U.S. shale gale over the past few years. Synthetic crude — produced from bitumen in upgraders — has been trading at a premium of US$101.44 per barrel this year compared to WTI’s $98.28. But lately it has been trading at a discount to WTI as high as US$19.
The light crude discounts come as Canadian heavy crude prices are already retracing their 2012 lows.
Western Canada Select was trading at $43.88 discount to West Texas Intermediate on Nov. 5, after narrowing to less than $25 per barrel for much of the year, First Energy Capital data shows.
“Discounts have widened not just for heavy crude but for light crude as well,” said Patricia Mohr, vice-president, economics and commodity market specialist at Scotiabank. “It’s really across the board.”
Seasonal refinery turnarounds in the U.S. and the ramping-up of Imperial Oil Ltd.’s Kearl project contributed to wider discounts on all crude grades, said Ms. Mohr. In addition, Enbridge Inc. served apportionment notices on a number of its lines for November, which also impacted a number of different crude grades.
While Canadian heavy oil will remain vulnerable due to lack of exit points, the light crude is also likely to take a hit due to growing production of competing blends from North Dakota, Permian and Eagle Ford basins, Ms. Mohr said.
The U.S. Department of Energy expects U.S. crude oil production to rise by a million to 8.5 million barrels per day by next year with drilling in tight oil plays in the onshore Williston, Western Gulf, and Permian basins expected accounting for the bulk of forecast production growth over the next two years.
“As production continues to grow unchecked, imports of light crude oil into the United States are set to contract further,” wrote Sabine Schels, Bank of America Merrill Lynch analyst, in a report. “The Gulf Coast is looking increasingly saturated, with crude oil inventories just 1.5 million barrels per day away maximum levels, further depressing the demand for imports.”
The U.S. has already displaced comparable light sweet crude from Nigeria and Angola, and Canadian light sweet crude may be next on the list.
The oil patch remains vulnerable to a lack of export diversification and optionality that creates a buyers’ market from time to time, said Ms. Mohr.
“The need for additional pipeline capability to the B.C. coast and Eastern Canada remains vital, despite the growing role of rail.”
An agreement between Alberta and British Columbia premiers to work on a framework to build the Northern Gateway will help Canada get “world prices,” said Krishen Rangasamy, analyst at National Bank Financial in a note to clients.
“The agreement between the two Western provinces is a longterm positive for the Canadian economy and its currency, not only because it will reduce the spreads, but also because it makes foreign direct investment into the oil sands more likely,” wrote Krishen Rangasamy, analyst at National Bank Financial in a note to clients.
Investment dealer Peters & Co. believes Canadian crude differentials will narrow, but remain volatile until more long-term expansion solutions are found. In the interim, BP Whiting heavy crude unit is expected to take in as much as 200,000 bpd, while a number of other projects such as the Seaway pipeline expansions come on line to ease the pressure.
“Most notably, increases in rail loading capabilities should reduce the magnitude of pricing swings going forward as capacity is added,” Peters & Co. said in a note, adding that it expects a string of new rail loading terminal announcements in the coming months.
But rising U.S. shale production will continue to upset the plans of Canadian and other producers.
“I think that the oil price dynamic in the Canada and U.S. are going to change quite markedly in the next 18 months because of the development of the new light tight oil in the United States,” Ms. Mohr said.