WCS Hits Record Lows

At the end of the day on December 3rd Western Canadian Select (WCS) futures, the reference price for heavy crude from the oil sands was trading at $27.95/barrel. WTI Crude (North American Crude benchmark), on the other hand, was trading at $52.95. WCS was trading at a relative discount of $25. This too after WCS was up by over 65% ($11.02) on the day because of Alberta Premier Notleys announcement. The spread/differential has continually grown to historic highs as global oil prices have increased over the past year but the price of WCS has rapidly declined from its high of $58.37 since May. In fact, in October WCS was trading at a $52/barrel discount compared to WTI.

 

At historic lows of $13.27 in mid-November, something needed to be done. For the first time since 1980, the province of Alberta will limit the production of oil. This cut of about 325,000 barrels a day along with a plan to acquire more rail capacity and Enbridge line 3 expected to open by the end of next year, WCS prices finally have some relief. Although WCS has historically always traded at a discount, why is the discount at such a high level now?

Reliance on the U.S.

For anyone that followed the NAFTA saga since President Trump was elected knows how reliant the Canadian economy is on the United States. For many years Canada has been working on diversifying our global trade and trade agreements like CETA and CPTPP will help with that a lot overall. However, without building more pipelines to the coasts, the Canadian Oil industry will remain strongly reliant on the U.S. Canada is the fourth largest producer and exporter of oil but 99% of our oil exports go to the U.S. This means that we are very reliant on the U.S. to buy our oil. Two of Canadian oil’s key U.S. customers have been offline and underground maintenance for some weeks. With both BP Plc’s Whiting refinery in Indiana and Marathon Petroleum Corp.’s Detroit refinery offline, a large amount of inventory has built up with nowhere else to be shipped.

Shipping Constraints

Roughly 35 million barrels of oil (double the normal amount) were sitting in storage and before these cuts, an additional 190,000 barrels were being added every day to storage because they were unable to be shipped out. Basic economics teaches that an excess of supply means prices will have to drop to compensate. Even if these lower prices increase demand, the oil still has no way of being shipped. Most pipelines are running near maximum and while rail capacity is increasing fast, it cannot keep up.

Need for Pipelines

Many activists say that if the Trans Mountain pipeline and other pipelines are allowed to be built, it will increase emissions because more oil will be produced from the oil sands. There is no denying that the emissions from the Canadian Oil Sands contribute significantly to Canadian emissions. There is also no denying that moving oil that pipeline spills can damage the environment around them. However, looking at the facts the lack of pipelines will not reduce the amount of oil being produced but it will just be transported in different ways, primarily by rail. In 2017, the oil industry shipped approximately 140,000 barrels by rail per day. By the end of this year, the amount of oil being shipped by rail could hit 300,000 barrels per day.

Greg Stringham an energy consultant said,

With further delays in pipelines, that’s increased the amount of oil that’s moving by rail but also increased the interest in that as well as companies look to that option.

Safest Method of Transportation

Experts say not only are pipelines the safest method for moving crude but also the most efficient and least expensive way to ship oil. In 2015 the Fraser Institute conducted a study analyzing the methods of transporting oil between 2003 and 2013. Although both rail and pipelines are considered safe methods of transportation, pipelines are by far the safer method. The study highlights that an incident is 4.5 times more likely when shipping by rail. Not only that but 99% of pipeline incidents did not damage the environment. If the oil is going to be produced and shipped regardless, should we not be using the safest method of transportation while reducing our reliance on the U.S. by building more pipelines?

Sources: Oil Price; CBC; Financial Post; Financial Post; Financial Post; BNN Bloomberg; Keep Canada Working; CTV News; CBC; Natural Resources Canada; Fraser Institute;