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Unfortunately for Canadian producers, the Gulf is awash in sour
crude thanks to Washington's largest-ever release from the
Strategic Petroleum Reserve (SPR) that will amount to 180
million barrels over a six-month period, in an attempt to tame
high fuel prices after Russia's invasion of Ukraine.
Millions of barrels of sour crude are flooding the market from
storage caverns in Louisiana and Texas. Heavy grades like Mars
and Poseidon at the U.S. Gulf Coast, the world's largest heavy
crude refining center, are languishing.
Western Canada Select (WCS) sold more than 3,000 kilometres
(nearly 2,000 miles) away in Hardisty, Alberta, is getting
dragged down with them.
The discount on July WCS for delivery in the Hardisty crude hub
reached more than $20 a barrel below the West Texas Intermediate
benchmark last week, the widest since early 2020.
"It's not great timing," said Rory Johnston, founder of the
Commodity Context newsletter based in Toronto. "The vast
majority of what's coming out of the SPR is medium sour crude.
It's hitting directly at that marginal pricing point for WCS."
The sour Gulf surplus is undermining what some market players
expected to be a period of stronger WCS demand in Hardisty, as
maintenance on oil sands projects reduces supply and as U.S.
refineries exit turnarounds.
Other factors causing the WCS discount to widen include the high
price of natural gas, which increases the cost of refining heavy
crude, and increased demand for lighter products like gasoline,
BMO Capital Markets analyst Randy Ollenberger said in a note.
PIPELINE CAPACITY
Canada exports around 4.3 million barrels per day (bpd) to the
United States, according to U.S. Energy Information
Administration (EIA) data, but until last year demand to ship
crude on export pipelines exceeded capacity, leaving barrels
bottlenecked in Hardisty.
In 2018, the discount on WCS in Hardisty blew out to more than
$40 a barrel, prompting the Alberta government to restrict
output.
Now there is sufficient pipeline capacity, WCS trades around the
same level as comparable crudes like Mexico's Maya. This means
Canadian producers get that value, minus the spot pipeline
tariff to the U.S. Gulf Coast, which is roughly $10 a barrel.
Canadian production is forecast to rise 200,000 bpd by the end
of 2022, according to the EIA. That could cause bottlenecks to
re-emerge until the Trans Mountain pipeline expansion to
Canada's Pacific coast is completed in 2023, adding 600,000 bpd
of capacity, said RBN Energy analyst Robert Auers.
"However, a massive blowout in differentials, like we saw in
2018, is unlikely since producers are likely to be prepared for
such a scenario and quickly ramp up crude-by-rail volumes in
anticipation of such an event," Auers said.
(Reporting by Nia Williams; Editing by Marguerita Choy)
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