Although a price squeeze on Canadian producers of bitumen and heavy oil has eased recently, pipeline access to waterborne trade remains essential, according to an analyst at Scotiabank, Toronto.
The price of Western Canadian Select (WCS) heavy crude oil rose from $58.38/bbl (US) in February to $66.73/bbl in March and about $68/bbl in April, reported the analyst, Patricia Mohr, in a commodity price report. The WCS discount against West Texas Intermediate crude fell from a record high $36.94/bbl in February to $26.23/bbl in March, $23.07/bbl in April, and, based on futures values, $13.90/bbl in May. The WCS discount is growing again in June.
Mohr attributed the recent narrowing of the WCS-WTI discount to:
● A seasonal increase in demand for Western Canadian crude oil as refineries in the US Midwest increased runs after unusually high maintenance downtime early in 2013.
● Operational enhancements allowing increased throughput in the pipeline system.
● Increased use of rail transportation, allowing crude from Alberta to reach the Gulf Coast, where heavy crude has higher value than it does at the WTI pricing hub at Cushing, Okla.
Mohr noted that capacity of the Seaway Pipeline between Cushing and the Gulf Coast expanded to 400,000 b/d in February but said actual throughput has remained at 300,000 b/d, dominated by light crude.
The analyst said: “The overall pipeline system from Canada to the United States still constrains flows of Western Canada’s oil to Texas, where heavy Mayan crude from Mexico (only marginally higher in quality than WCS Heavy) is currently priced at $96/bbl—above WTI oil at $91—and $25 above the $68 garnered by heavy oil producers in Western Canada (subtracting a $2-3/bbl quality discount but not adjusting for transportation costs.”
Approval of the US-Canadian border crossing of the Keystone XL pipeline, she said, would boost flows of Canadian crude to the Gulf Coast refineries needing heavy feedstock, “significantly boosting prices for Alberta and Saskatchewan heavy crude.”
If Canadian oil producers are to be assured of world prices, Mohr said, pipeline access to the West and East Coasts must increase.
The average price of Saudi Arabian heavy crude delivered to China in the first quarter this year was $106/bbl, she pointed out.
“Given the low cost of tanker shipping and pipeline transportation, the netback for Alberta sales of heavy crude in China would have been quite high in the first quarter, probably more than $95/bbl, had transportation infrastructure been available,” she said, adding that tanker shipping from British Columbia to China costs only $3-4/bbl.