CALGARY — While most Canadian oil is being sold at a huge discount to U.S. benchmarks, barrels that can find their way to the prized Gulf Coast market are securing international prices — and even selling at a premium on some days.
A barrel of Western Canada Select at the oil price hub of Hardisty, Alta., traded for US$19.49 on Wednesday for December delivery. But the same barrel of heavy Canadian oil is fetching US$64.74 in Houston, near the West Texas Intermediate benchmark price of US$66.44, AltaCorp Capital analyst Nicholas Lupick said.
“We’re not even talking about a different barrel,” Lupick said, explaining that the WCS Canadian blend is trading at two different prices depending on whether it’s sold in Alberta or Texas.
Lupick analyzed daily trading data for months and found some Canadian oil companies fortunate enough to move their barrels to the U.S. Gulf Coast are able to realize prices similar to heavy oil blends from Mexico, Venezuela and elsewhere — which have been trading at or above the price of WTI. On Oct. 9, for example, Mexico’s Maya crude was trading at US$77.17 per barrel on Oct. 9, above WTI’s $74.96.
Lupick believes that a handful of Canadian oilsands producers such as MEG Energy Corp. and Cenovus Energy Inc. are capturing global prices on a portion of their production as they have publicly stated they have pipeline or railway capacity to ship their barrels to the U.S. Gulf Coast.
Still, it’s difficult to know which producers are getting discounted prices and which are earning a premium, as companies treat pipeline, trading and refinery contracts as commercially sensitive information, said Kevin Birn, vice-president, North American crude oil markets at IHS Markit.
As much as 2.64 million barrels per day of Canadian oil reached the less lucrative Midwest refiners on average in the first seven months of the year, but only around 458,000 per day was headed for the Gulf Coast, according to the U.S. Department of Energy.
“If you can physically move it on some sort of take-or-pay arrangement, the price you’d be able to get is that price in the other market less the transportation cost to move it there,” Birn said, referring to the price dislocation between Alberta and Texas. “The problem is not everybody has that (transportation arrangement).”
The fall in heavy oil production elsewhere and the oilsands transportation woes could lay the ground for a multi-year bull market for the blend, according to analysts.
Suncor’s base plant with upgraders in the oilsands in Fort McMurray Alta.
Precipitous declines in heavy oil from places like Venezuela, Mexico and Iran, combined with OPEC cuts to heavy oil production have led to a faster-than-expected drop in heavy oil availability in Texas and Louisiana — an area with the world’s largest concentration of heavy oil refineries.
“In a world that is now flush with oil, the availability of light oil has gone up, but the availability of heavy has contracted,” Birn said, adding that heavy oil refineries especially on the Gulf Coast have been worried about this trend for a few years.
As the only heavy oil producing country to be increasing its production, Canada is well-positioned to capture that bull market, although it’s held back by insufficient pipeline infrastructure.
“The largest near-term fix for this is more railroad,” ARC Energy Research Institute executive director Peter Tertzakian said. Canadian oil-by-rail exports hit a record 229,541 barrels per day in August according to the National Energy Board, and analysts expect those figures to reach 300,000 bpd by the end of the year.
Tertzakian expects rail will continue to be in use until TransCanada Corp. completes its Keystone XL pipeline, which would move an additional 830,000 bpd from Alberta to Texas, bringing price relief to Canadian producers.
“This is the right grade of oil and if it could get to market, it could get a premium over time,” Auspice Capital founder and chief investment officer Tim Pickering said of Canadian heavy crude.
This is the right grade of oil and if it could get to market, it could get a premium over time
Auspice Capital founder and chief investment officer Tim Pickering
In recent weeks, trading activity in Canadian heavy oil blends has increased dramatically, Pickering said, adding that traders and institutional investors are aware of the value of the product in Texas and Louisiana and at overseas heavy oil refineries.
Still, heavy oil’s premium over WTI on the Gulf Coast may be a temporary phenomenon.
“I’m not sure I can see it in the long run,” GMP FirstEnergy director, institutional research Martin King said, noting that heavy oil is more difficult to process than light oil, which is partly why heavy oil has traditionally traded at a discount.
Jackie Forrest, vice-president at ARC Energy Research Institute, said that heavy oil has been fetching a better price than WTI but still trading lower than the global benchmark Brent or the U.S. coastal benchmark Louisiana Light Sweet (LLS).
She expects global heavy oil prices could tumble slightly when the International Maritime Organization (IMO) implements new rules on emissions from ships, which would affect heavy oil adversely.
Still, Forrest said, “IMO or no IMO, there’s going to be demand for heavy oil.”
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