Oil prices are rising, but Canada is getting relatively less for every barrel – here’s why

Oil prices around the world are at their highest level in years, but Canadian oil sands producers are seeing comparatively less for every barrel due to supply and demand imbalances.

The benchmark price for North American oil, a blend of crude known as West Texas Intermediate or WTI, changed hands for US$119 a barrel on Tuesday – a striking distance from the multi-year high of US$120.99 after Russian President Vladimir Putin’s invasion of Ukraine in February threw the market into turmoil.

WTI is what is called a “light, sweet” blend, so named because it is less dense than “heavy” oils and contains much less sulfur than others that are considered “sour”. “. These chemical qualities make refining, storing and shipping easier and cheaper, which is why WTI has become the popular benchmark for oil prices.

But countless other blends exist, including the type of oil that comes out of Alberta’s tar sands, a heavy, sour blend known as Western Canada Select or WCS. Crude from Canada’s oil sands almost always trades at a discount to blends like WTI because it must be diluted before shipping and because there are associated transportation difficulties in getting it out of the Alberta landlocked and in pipelines or railcars to US Gulf refineries. coast.

Typically, this discount is around US$10-15 per barrel, but recent events have pushed the spread past $20. It’s the widest since November, and close to the $24 gap seen at the very start of COVID-19 when the price of oil fell.

This means that even if WTI flirts with US$120 a barrel, Canadian oil sands producers only receive US$99 for their product.

There are many reasons for this, but they all boil down to one fundamental rule of economics: supply and demand.

Different oil blends require refineries to be sized differently to handle them, and many refiners are not set up to handle heavy blends like WCS. During the pandemic, production of many heavy mixes slowed, which inadvertently helped secure buyers for WCS.

“For a long time, WCS really took advantage of the reduced availability of Mexican heavy crude and Venezuelan crude,” said Rory Johnston, founder of oil market data service Commodity Context. “All the other heavy roughs in the area that they traditionally competed against, they were gone, so WCS was almost the only game in town.”

A cup of heavy oil extracted from the Canadian oil sands is shown. Canadian oilsands crude is still trading at a discount to more popular US blends, but that price differential has widened in recent weeks. (Reuters)

But this is no longer the case. Production of a heavy Mexican blend known as Mayan crude is booming, as are medium-heavy blends from offshore platforms like Mars and Poseidon.

The result is that refiners taking these heavy blends aren’t short on supply, so they can afford to be more selective about what to pay and who to buy them from.

“You have more options, so you’re not taking as many as usual,” is how energy analyst Fernando Valle of Bloomberg Intelligence describes the mindset of U.S. heavy crude refiners in this moment.

This slowdown in demand also comes against the backdrop of an increase in supply in Alberta. May is generally a slower month for oil production in Canada’s oil patch, as changing weather conditions lead to what Valle calls a “thaw.”

“It’s hard to move rigs because the ground thaws, so there’s usually a decline,” he said in an interview. That’s why many facilities voluntarily or involuntarily close each spring, but early indications are that production will rebound strongly this summer. And all that excess Canadian oil is already starting to pile up.

Canadian oil inventories are already at their highest level since 2019, and they are on track to rise this month, according to data from Bloomberg. In the context of this oversupply and falling demand, a growing price differential for Canadian oil makes perfect sense.

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“Inventory in Hardisty, Alta., is fuller than inventory in Cushing,” Valle said, referring to the oil hub in Cushing, Oklahoma, the central transportation hub of the U.S. energy industry, at through which nearly every barrel of oil flows. at one time or another.

“That’s ultimately what that differential is telling you.”

The Biden plan will release even more barrels

This imbalance could get worse before it gets better due to a plan announced earlier this year by the Biden administration to release millions of barrels of crude oil from the strategic petroleum reserve to offset the uproar caused by Putin’s invasion.

Nearly 40 million barrels of crude should be on the market from July 1 the US Department of Energy said last monthand the mixture of crude released is sour, making it similar to the type of oil offered by the tar sands – and all will be released near the cluster of US Gulf Coast refineries that Canadian producers also sell.

This projected release is more than 10 times greater than Canada’s oil sands production on a typical day, so a market flooded with such a quantity of sour crude is likely to drive the price of oil even further down. Canadian products.

“That Alberta material is still going to be shipped there,” Johnston said. “They’re just going to have to cut it further to sell it.”

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