WoodMac: High WCS-WTI price spread seen lingering

Nov. 3, 2014
Growing production of Canadian heavy crude oil and problems delivering the new supply to distant markets will keep the discount of Western Canadian Select crude high against the West Texas Intermediate price, according to Wood Mackenzie.

Growing production of Canadian heavy crude oil and problems delivering the new supply to distant markets will keep the discount of Western Canadian Select crude high against the West Texas Intermediate price, according to Wood Mackenzie.

“We expect the WTI-WCS differential not to return to historic lows; rather the annual average of the differential will be fairly wide, in the $18-25/bbl range, into the next decade,” the consultancy said in a brief analysis.

Historical price data from Baytex Energy Corp., Calgary, which produces heavy oil in Alberta and Saskatchewan, show that since 2005 the annual average difference between the WTI futures price and WCS market price has been as low as $9.66/bbl (US)—in 2009.

The average spread exceeded $20/bbl in each year during 2005-08 and has exceeded that level each year since 2012. The largest annual average price spread was $25.20/bbl in 2013.

WoodMac expects production of diluted oil sands bitumen to increase by 1.3 million b/d by 2020, pushing total heavy oil output to 3.3 million b/d.

Increasing discount

But the new supply must reach markets beyond traditional refining centers in the northern US Midwest and Rocky Mountains. Transportation constraints impede the movement, increasing the natural discount of heavy WCS relative to lighter WTI as production grows.

The WoodMac analysis assumed TransCanada’s proposed Keystone XL pipeline, which would increase capacity to carry Alberta crude to the US Gulf Coast, starts operations in late 2018. It assumed Kinder Morgan’s proposed expansion of the Trans Mountain system between Alberta and Vancouver starts up in late 2019.

It assumed other pipeline projects receive approvals and start up as warranted by growth in supply. Rail transport increases “whenever the WCS supply greatly outstrips the pipeline takeaway capacity,” the consultancy said.

According to the analysis, Gulf Coast refineries will increase their consumption of heavy Canadian crude tenfold from 2013 to more than 1 million b/d in 2020.

Movement of heavy crude to Asia depends on proposed western pipelines: the Trans Mountain expansion and Enbridge’s Northern Gateway project. WoodMac said it expects both to be fully utilized when completed because China offers the highest producer netbacks.

“When these pipelines start up, they would pull heavy crude from more expensive transportation modes like rail and more distant destinations like the [US Gulf Coast], and this would exert a narrowing effect on the WTI-WCS differential,” the analysis said. But WCS deliveries would recover as production continued to increase, widening the spread again.