Daily Management Review

Canadian oil industry is in distress


12/18/2017


Canada's oil sector is in distress. Oil from the oil sands of this country is sold at a discount of $ 27 in relation to the American WTI, and this is the biggest difference in price over the past 4 years.



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Contracts for Western Canada Select (WCS), which is a benchmark for the Alberta oil sands, have fallen in price to $ 30 per barrel. Generally, WCS always trades at a discount to WTI. This is due to the difference in the quality of oil itself, and the cost of transporting raw materials from Alberta for hundreds of miles, but usually this discount is about $ 10.

Now the situation has radically changed: the discount is just over $ 25. This is the maximum for the last 4 years. The fall in the cost of Canadian oil, which we see now, has not been observed for many years. However, there are quite logical explanations for this.

First, the spill and shutdown of the Keystone TransCanada pipeline in November reduced the supply of oil from Canada to the US. This, in turn, led to a slight surge in the cost of WTI, as demand for American oil rose. In Canada itself there was an excess, accordingly, and WCS became cheaper.

Railway companies, in turn, could not replace the transportation of Canadian oil. It is very difficult for railways to change the schedule of their work in the shortest possible time: there are understandable limitations both for personnel and for capacities. In addition, the railway companies of Canada were engaged in the supply of grain, which had already been detained.

In general, it is worth recalling that rail transportation became unprofitable after the collapse of oil prices in 2014, and transport companies switched to other goods.

In general, from the economic point of view, the transportation of oil from Canada by trains looks absurd, since its cost is $ 24 per barrel. However, given how cheap Canadian oil is now, US refineries still can afford it.

Of course, interruptions of supplies via Keystone are the main reason for the fall in prices for WCS. Another important problem is also the lack of an alternative pipeline, although recently alternative ways of oil supply from Canada have been discovered.

In theory, there are several large pipeline projects, but all of them still face obstacles. Keystone XL, Trans Mountain Expansion and Enbridge - each of them could send oil from Alberta, but none of them will be launched in the near future. This in turn means that the discount on the WCS will remain for some time.

At the same time, the current WCS discount of $ 27 per barrel, according to IHS Energy estimates, leads to a loss of $ 20 million a day for oil producers in Canada.

Perhaps, this explains the relative weakness of the Canadian dollar. From a technical point of view, there is a further potential for weakening.

source: zerohedge.com






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