Canada’s oil prices trail futures as refining costs rise

Canadian heavy crude prices have collapsed relative to futures prices because of high refining costs rather than the pipeline bottle necks that have plagued the industry in the past, according to a Toronto-based analyst. 

Western Canadian Select discount to the benchmark West Texas Intermediate grew to more than US$20 barrel on Friday, the widest since November, data compiled by Bloomberg show. In recent years, a shortfall of export pipelines was resulted in a widening discount to as much as US$50 a barrel for Canadian heavy oil. 

Now, the cause is related to the quality of Canadian crude, Rory Johnson, managing director and market economist at Price Street wrote on Twitter. The situation is similar to last fall when the discount also exceeded US$20 a barrel, Johnson said, referencing a note from November. About half the discount to the benchmark, at that time, was due to the quality of the crude oil. 

The discount is “not great but certainly not terrible,” Johnson said in the tweet. It’s “being driven predominantly by quality-related factors (this isn’t a pipeline issue, at least not yet).”

The high-sulfur, heavy nature of oil produced in the oil sands of Northern Alberta means it always trades at a discount to lighter oil grades because it’s more expensive to refine. Higher natural gas costs, which climbed almost 10 per cent on Monday, make refining heavy crude more expensive. At the same time, as OPEC+ produces more crude, additional sour oil is released onto the market.

Western Canadian Select rebounded on Monday, with the discount at Hardisty, Alberta, narrowing 30 cents to US$20.50, data compiled by Bloomberg show. On the U.S. Gulf Coast, the discount narrowed 50 cents to US$8.60 a barrel. 

Source: BNN Bloomberg