Why Is Canadian Crude Selling For Under $25?

No recovery for the oil industry in Alberta.

By Nick Cunningham, Oilprice.com

Oil prices in Canada plunged late last month, with the losses continuing throughout much of October. Canadian oil producers exposed to the low prices are now fetching around $40 to 50 per barrel less than their counterparts in the United States. Western Canada Select (WCS), which tracks heavy oil from Canada, typically trades at a discount relative to WTI. The lower price reflects quality issues, as well as the cost of transport from Alberta to refineries in the U.S.

But WCS currently trades at $24.94 a barrel, while WTI trades at $66.30.

In early 2018, the discount started to grow significantly, the result of Canadian pipelines filled to the brim. The inability of the Canadian oil industry to build a major pipeline from Alberta to either the U.S. or the Pacific Ocean is increasingly dragging down WCS. Keystone XL, Northern Gateway, Energy East, Trans Mountain Expansion – all of these pipeline projects have run into years of delays, and in the case of Northern Gateway and Energy East, scrapped all together.

That left WCS prices languishing at discounts in excess of $30 per barrel at times this year. But the problem blew up into a deeper crisis in late September. Maxed out pipelines are still a problem, but now refineries in the U.S. Midwest are in maintenance season, curtailing demand for Canadian oil.

BP’s massive Whiting refinery in Indiana, Phillips’ Wood River and Marathon’s refinery in Detroit all undertook maintenance, according to CBC. WCS plunged to the low $20s per barrel, implying a discount of about $50 per barrel to WTI. The recent decline of WTI below $70 per barrel has somewhat narrowed the differential to the mid-$40s per barrel.

The discounts mean that the oil industry in Alberta is losing around $100 million per day, according to GMP FirstEnergy and CBC. Wood Mackenzie told CBC that the refineries should come back online “within the next few weeks.”

Producers are turning to rail to ship their product to the U.S., a much more expensive route. Oil-by-rail shipments from Canada to the U.S. hit an all-time high of 204,000 bpd in June, according to Rory Johnston of Scotiabank. By the end of the year, rail shipments could reach 300,000 bpd.

“Given the multitude of challenges currently faced by Canadian energy infrastructure projects, many in the industry increasingly see oil-by-rail less as a temporary Band-Aid and more as a permanent, flexible component of the supply chain to a Canadian energy sector seemingly unable to push a major pipeline project to the finish line,” Johnston wrote in a note.

Echoing that sentiment, the International Energy Agency said in its latest report that Canadian oil producers are beginning to lock in long-term contracts with rail companies, a practice that oil producers once tried to avoid.

Because the industry expects some additional midstream capacity in the medium-term, inking rigid contracts with rail companies for many years into the future was not the most desirable route. Meanwhile, from the perspective of the rail industry, adding capacity to handle oil was also a risk since oil producers only want rail space for the year or two.

However, the ongoing setbacks for pipeline projects, in particular the severe blow to the Trans Mountain Expansion, might have changed some minds on both sides. “Rail companies are locking in customers with multiyear contracts, as the decision by a Canadian court to overturn the approval of the Trans Mountain pipeline project is firming up demand,” the IEA said in its October Oil Market Report. “Cenovus Energy, for instance, announced a three-year deal with Canada’s CP Rail and CN Rail to transport 100 kb/d of crude from its oil sands facilities in Northern Alberta to the US Gulf Coast.”

Cenovus says that shipping oil to the U.S. Gulf Coast costs around US$20 per barrel.

Scotiabank estimates that WCS will average a $24-per-barrel discount to WTI throughout 2019. Once Enbridge’s Line 3 replacement comes online in 2020, that could add several hundred thousand barrels per day of takeaway capacity, which could narrow the WCS discount to $21 per barrel. Still, that leaves an uncomfortably long time for oil producers, who will have to struggle with painfully large discounts for WCS over the next year or so. By Nick Cunningham of Oilprice.com

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  31 comments for “Why Is Canadian Crude Selling For Under $25?

  1. Javert Chip
    Oct 23, 2018 at 8:04 pm

    Yikes.

    Losing US$100M per day is US$36B/year ($47B Canadian) – or 2.2% of Canadian GDP. That’s a BIG number.

    • Four Zhu
      Oct 23, 2018 at 8:32 pm

      It is true. Even though Canada is one of the largest oil producer, Ontario Quebec and British Columbia import the crude oil from US. This is a long history of political problem to build pipelines from Alberta to the east and the west. Only tariff might help Canadian crude; otherwise, oil sand will soon be dead…

      • carl
        Oct 24, 2018 at 6:51 am

        Don’t forget our feminist human rights loving prime minister TURDeau has no problem importing oil daily from the champions of human rights the Saudi’s. All done by design!

    • Oct 23, 2018 at 8:32 pm

      I think it means “lost revenue” not actual “net losses.” But it’s still a huge number.

      • Paulo
        Oct 24, 2018 at 10:54 am

        Exactly. Many Oil Sands companies are doing quite well. Plus, when the pipelines finally go to the coasts (which I believe they will) then the US market will be mostly bypassed.

        The next Federal election is in 2019. After, I expect whoever wins to declare new pipeline routes a national interest and pass all required legislation to get it done.

        As for the Oil Sands dying, my son works there building and maintaining big haulers and shovels. He works two weeks on and two weeks off and is extremely well paid for it making +200K per year plus full benefits. For an industry in death throes there is sure a lot of investment going on as the fleet and tools are refurbished, replaced, and expanded.

        I have been reading about the imminent collapse of the Oil Sands due to the ‘spread’ for almost 40 years. I have relatives who were involved in the first big expanion to Ft Mac in the ’70s, and now we are on the 2nd generation. They still can’t find enough qualified tradesmen/women.

        Of course the Middle East is just so darn stable and reliable maybe those Sands are on life support. /sarc

        regards

  2. CoonT
    Oct 23, 2018 at 8:53 pm

    between all the baby boomers and oldsters about to pass on a massive amount of money to their kids, and all the new immigrants that are being stuffed into new home construction rowhomes; the fiberal government knows where and how to squeeze. Where’s this quote from? “Double the taxes! Triple the taxes! Squeeze every last drop, out of those insolent,musical peasants” Sounds just like the turd jr. No cheating. Whoever gets it wins…

  3. Maximus Minimus
    Oct 23, 2018 at 9:14 pm

    This article claims the low price is due to pipelines. Not quite, it is due to Canada’s inability to make anything value added from their resources, including oil. It is piped to US and returned as gasoline.

    • Paul
      Oct 24, 2018 at 5:29 am

      A more significant factor, I believe, is that this is heavy crude, and probably must be blended with lighter stock before refining.
      A bit like Venezuala.
      However, given the light shale oil available, should be able to work out something.

    • Paulo
      Oct 24, 2018 at 11:04 am

      There is excess refining capacity in the entire world and if it was a sound proposition it would have been done long ago. A buyer chooses to produce what they need and often cannot accomodate huge influxes of single product like gasoline or diesel. Plus, there are different grades of all products. Do you send a tanker load of just Jet B to Singapore? Maybe one of low-lead 100 octane to Hong Kong, Diesel to China when they need mixed products? The Trans Mountain pipeline already moves mixed products as required. There is refining done in Alberta and Kamloops, with one small one in Vancouver. The sales determine what is moved, not the other way around. You can’t tell the customer what they need, it’s the other way around.

      • Maximus Minimus
        Oct 24, 2018 at 11:28 am

        I am aware of that, but this is not a simple oil issue, as well, gasoline is not the only oil product. There are other mineral resources that leave the country as concentrates to be refined elsewhere. They invariably come back as trade deficits.

  4. Nash
    Oct 24, 2018 at 4:16 am

    Perhaps we should close the tar sands but I am certain the rich American owners will never allow that so soon as they deplete us shale maybe they can turn on the tap till then the price GDP will widen

  5. raxadian
    Oct 24, 2018 at 6:30 am

    Because they should be exporting it like crazy to places were is way more expensive and because cheap oil only exists due to the scam of shale oil?

  6. Beverley L Kennedy
    Oct 24, 2018 at 6:59 am

    My understanding is that many US shale oil producers are under water debt wise even though this was supposed to be the year of balanced budgets
    Also this mess of a bottleneck was building from past Canadian governments not just the current one
    Further large energy producers have a habit of over estimating what they need for transport capacity in order to ensure what they can deliver on a basic fill is delivered
    It will take a long time for this bottleneck to clear and by then we will probably be deep in the next global recession

  7. Nicko2
    Oct 24, 2018 at 7:55 am

    $40 billion Kitimat LNG plant will be the energy gateway to Asia for the next century. Economies of Edmonton and Calgary are buoyant – investments in modern infrastructure and transition to a information/hi-tech economy and generous immigration is paying off. Oh and hey, Calgary will most likely get the 2026 Winter Olympics.

    • Augusto
      Oct 24, 2018 at 8:39 am

      I live in Alberta, and I don’t know what the heck you are talking about. The economy is held up by massive government borrowing and spending. The downtown of Calgary is a ghost town and the Edmonton yards are dead, but the government offfices are awesome hives of activity between the hours of 10 and 3 Monday to Friday. The oil industry is hurting badly. The Kitmat LNG project is for BC, and a long way from Alberta. There will be some work for Alberta but the B.C. is and will maximizing the benefits for itself, which I might add are substantially less than the media is pumping out. ( I used to be involved in this project and know many who still are). The BC government took a substantial hit on royalties to get this deal done-mainly because longterm prices are substantially down across Asia, as there are many projects ramping up. The real benefits as well as the risks go to the project owners-price of natgas will hopefully will still be decent by the time project is built. As to the Olympics, I, many and I Hope most in Calgary will be voting against the Olympics this fall.

      • Maximus Minimus
        Oct 24, 2018 at 11:37 am

        I haven’t heard it, yet, but I am with you about that corrupt Olympic train wreck. Let that bloated, useless extravaganza never bankrupt any other place, especially in Canada.

  8. Augusto
    Oct 24, 2018 at 9:00 am

    You know spending most of my working life in Alberta, in the oil and ag industries, it is fascinating to read this article and commenters. Let me assure you things are not good here. The hostility of our government sector to the main economic money maker, oil and gas, at all levels, is only matched by it’s utter incompetence. It is the lack of long term investment, the emigration of skilled young people, and the growing amount of debt in the public and personal world that are most troubling. Of course all these problems are, not surprisingly like the whole Western world, eating it’s own for no rational reason-conjuring economic fantasy lands that don’t and can’t ever exist in place of what the really have or had. On a more practical note, I would point out that the use of the railways for oil in Western Canada is crowding out other important industies, raising their costs , making them uncompetitive, that is ag, mining, lumber, etc…

    • Nicko
      Oct 24, 2018 at 10:12 am

      And yet Alberta leads Canada this year yet again in GDP growth. Honestly you guys are a depressing lot. My rental income has only gone up in Calgary, valuations are stabilized. It can only get better.

      • Oct 24, 2018 at 12:42 pm

        Nicko,

        From your prior comments, I gathered that you now live in Cairo, Egypt. Are you sure you’re fully in tune with what’s going on in Calgary, Canada?

        • Augusto
          Oct 24, 2018 at 5:15 pm

          Agree Wolf. I know a couple of Real Estate Agents in Calgary and they are singing the blues, prices down, sales down, dropping, dropping…. There are for sale signs everywhere, commercial real estate in the Core is a disaster, but still developers haven’t put the brakes on the Condo explosion, yet…..I have a few friends who have sold their boomer home and are renting, waiting for the bottom on real estate, likely this spring when people who have put off selling start the big dump. I also know a few younger people who have bought homes, but held onto the Condo, renting it out, because they don’t want to take a loss…..so maybe this is the “stabilization”, that being the point where one hovers before the big plunge…..It will be bad…a few of my construction friends are getting nervous right now…

    • Four Zhu
      Oct 24, 2018 at 10:15 am

      Another interest hike today in Canada, which will make Alberta oil and gas industry more unattractive… I think the read problem for Canada is that there is no high-tech industry in this country. Even for oil and gas, very limited and out-of-date refineries in central Canada. Well educated people with PhD degree can’t find a job. Canada government think Canada is California but Canada is more similar to Brazil…

      • Paulo
        Oct 24, 2018 at 11:15 am

        You’re kidding, right? Yeah, we don’t have schools or good attractive healthcare, we just sell stuff we find in the forest if our rubber tired sandals aren’t wore out. Two minute Google search produced this.

        “The World Economic Forum just released their 25 most high tech cities in the world. Three Canadian cities below made the cut: Montreal was #18, Vancouver #14 and Toronto, of course, is #9.”

        “In the same way, international tech companies and investors now consider Canada as the best environment in which to do business, expand or relocate. And the numbers support this. Toronto, Vancouver and Montreal regularly make best-of lists naming the top cities for tech innovation and finding talent.”

        My province: “British Columbia’s tech sector generates around $15 billion in GDP, which translates to seven percent of its economy. By comparison, its forestry sector (wood, pulp and paper production, logging, and silviculture) is responsible for just over three per cent of total GDP.”

        • Paulo
          Oct 24, 2018 at 11:25 am

          My last post as this will be WS quota. :-) I worked for a guy who once said, “I don’t give a sh*! what you know, I just wanna see what you can do.” Degrees might…..might open a door, but just because someone has a PhD doesn’t mean much beyond going to school 3-4 more years than someone who doesn’t have one. Work experience and appropriate specific training is far more important.

          The smartest employer I ever worked for had all of grade 8. Go figure. Of course he owned the business. :-)

      • Augusto
        Oct 24, 2018 at 5:34 pm

        Oil and gas and agriculture are the driver of high tech here. I never saw high tech in Alberta as a stand alone industry, but something that thrives within other industries. Horizontal drilling, fracking, controlled release fertelizers, new drill muds, geophysical processing, remote control wells, pipelines, plant facilities…I would guess the oil industry is one of the highest and real users of solar panels that run remote electronically controlled facilities (avoids putting power lines into the middle of no where)…all very high tech and increasing devoid of people. As for Ag, there are hardly any farmers anymore here, with giant GPS controlled ploughs, planters, harvesters, etc… doing the work of hundreds…yeah there’s a driver, he just better keep his hands off the wheel not mess with tractors programmed activities (matching lab tested soil, nutrients, fertilizer mix, satellite maped on a square foot based, GPS program)Still the driver will get to put the 1/4 Million$ beats back on the flatbed truck after its done the work though. We don’t plow with horses, drill oil wells with steam engines or use divining rods except at the Western Museum.

        • Four Zhu
          Oct 24, 2018 at 6:01 pm

          Augusto,

          Your comments are very true. I was told that Petroteq invented a technology last year about the oil sand extraction. It looks more cost and environment effective than SAGD. https://petroteq.energy/technology/oil-sands-extraction

          However, the question is that Canada, especially Alberta, is leaning towards to CANNABIS business. Marijuana could be a money maker and a economy driver but it will bring a lot of side affects.

          I admire a lots of graduates from University of Alberta. They are really good at engineering and computer science. Some guys are famous leaders in the AI field in the world. But it is hard to believe that there is no IT industry in Alberta.

  9. raxadian
    Oct 24, 2018 at 2:05 pm

    Wolf, now that cheap credit is a thing of the past, are shale oil companies sinking or what?

    • Oct 24, 2018 at 6:02 pm

      Cheap junk-rated credit is very plentiful at the moment, despite the market declines. Spreads between junk and Treasuries are very tight. No problem in the junk-funding department for now :-]

  10. FlashFlud
    Oct 24, 2018 at 5:26 pm

    Crude it’s a combination of undercapacity on pipes getting out vs. regional production, plus turnaround season at the refineries. Combination of Line 3 replacement delays on the Enbridge side, Trans Mountain opposition in Burnaby on the Kinder Morgan side, and Keystone XL now in its 10th year of trying to get approvals to put shovels in the ground.

    But that’s all old news.

    You want to see something scary? Look at AECO natural gas hub prices spread against Henry Hub. There’s often NEGATIVE pricing. Crazy.

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