Canada’s benchmark heavy crude, Western Canada Select (WCS), is trading at a steep discount to West Texas Intermediate (WTI) after weakening sharply last month, and is expected to remain subdued well into next year.
WHY IS WCS UNDER PRESSURE?
WCS for delivery at the Hardisty, Alberta, hub is trading close to $30 a barrel under WTI, having averaged $16.67 a barrel below WTI for the first three quarters of 2022.
A number of factors are to blame.
For much of 2022, the United States has been releasing barrels from its Strategic Petroleum Reserve (SPR) to combat high oil prices. The release of millions of barrels of predominantly sour crude has left the U.S. Gulf Coast, home to the world’s largest heavy oil refining centre, awash in crude of similar quality to WCS.
In September, BP-Husky Toledo, Ohio, refinery operated by BP Plc, which processes up to 90,000 barrels per day (bpd) of heavy crude, shut following a fatal fire.
The Canadian oil market was slow to react to the Toledo outage, according to a Calgary-based industry source, and as other U.S. refineries went into scheduled turnarounds cutting demand further, WCS-WTI differentials collapsed.
Other factors weighing on WCS include competition from cheap Russian crude on the global market and high natural gas prices that made refining heavy oil more expensive.
Meanwhile, output in Alberta, home of the oil sands and Canada’s largest crude-producing province, hit a record 3.88 million barrels per day in September, up 9.6% from the same period a year earlier, according to ATB Financial.
HOW DOES THIS COMPARE TO PREVIOUS BLOWOUTS?
WCS hit a record discount of more than $50 a barrel below WTI in October 2018 when a lack of space on export pipelines and refinery maintenance led to a glut of crude in Alberta.
However, unlike previous WCS blowouts, the current deep discount is led by weak downstream demand, rather than pipeline bottlenecks. Since Enbridge Inc’s Line 3 replacement project started operating last year, Canada’s export capacity has been broadly in line with production.
WHO IS MOST AFFECTED?
Pure-play heavy oil producers without refining capacity are most impacted by weak WCS prices. These include MEG Energy and Athabasca Oil, according to RBC Capital Markets.
A number of industry analysts and company CEOs, including Cenovus Energy CEO Alex Pourbaix, say they expect a deep WCS discount to persist throughout the first half of 2023.
The U.S. SPR releases are due to wind up at year-end, but upheaval in the global crude market due to Russia’s invasion of Ukraine is clouding the outlook for WCS.
“I can’t say it’s very bullish as long as Russia is still being Russia,” one broker said.