Canadian heavy crude prices reached their weakest relative to US oil futures since 2018, when a massive pipeline bottleneck prompted Alberta’s government to impose production limits on the largest producers. Western Canadian Select’s discount in Alberta to a monthly average of West Texas Intermediate futures grew to $31.70 a barrel early Tuesday, the widest since November of 2018, according to Modern Commodities and General Index prices. The secondary benchmark Canadian Cold Lake crude’s discount on the US Gulf Coast was at similarly wide levels not seen in eight years, standing at $23.10.
The widening discount has been caused by factors such as soaring worldwide rates for oil tankers and imports of competing Venezuelan heavy crude in the US Gulf. The lower price for Canadian oil is expected to continue through the fourth quarter, oil sands producer Imperial Oil Ltd., a unit of Exxon Mobil Holdings Corp., said in an earnings call last week. Some large oil sands producers such as Suncor Energy Inc. have refineries that can benefit from lower crude prices.
But the growing discount has come as a headwind for many companies, limiting the ability of heavy oil producers to fully benefit from a run-up in worldwide crude prices that now sit above $100 a barrel. In late 2018, Canadian heavy crude’s discount grew to almost $50 a barrel as production outpaced the growth of pipeline space. The situation became so critical that Alberta’s government imposed production limits on the largest crude producers.
Those restrictions were relaxed and eventually eliminated over the following two years. Unlike then, today’s widening discount is the result of international factors rather than a local pipeline shortage. Disruptions from the Iran war caused rates for oil tankers to surge, constraining shipments for overseas markets, especially off the US Gulf Coast where much Canadian oil ends up.
In addition, greater supplies of competing Venezuelan oil are being shipped to US refineries and less to Asia. The widening discount in the Gulf of Mexico has incentivized shipping off the Trans Mountain Pipeline, the only pipeline that runs from northern Alberta to Vancouver. Tanker exports off Trans Mountain rose to a record last month.
While rates for the smaller Aframax tankers that service Trans Mountain have increased, they have not risen as much as the supertankers that service the US Gulf and the much shorter distance to East Asian markets makes shipping relatively less expensive.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing