Why does Canadian Oil sell for $20?

The price of Canadian Oil plunged last month and with the losses continuing through most of October.  With the Canadian oil firms exposed too much lower prices than their competitors in the USA by as much as $40 to $50 a barrel.

Due to the cost of Transporting oil from Alberta to the refineries in the United State, Western Canada Select (WCS) oil trades at a discount relative to WTI.  In 2018 this discount started to grow as a result of Canadian pipelines being filled with a brim.

The problem is that Canadian Oil has failed to build a major pipeline from Alberta to either the US or the Pacific Ocean.  The existing pipeline projects have run into years of delay or have been scrapped.
This left WCS prices languishing at a deep discount of $30 a barrel during this year.  The problems increased in late September with pipelines being maxed out.  And the massive BP refinery in Indiana undertook maintenance.  The WCS oil price plunged to the low of $20 a barrel.
The discounts mean that the oil industry in Alberta is losing around $100 million per day, according to GMP FirstEnergy and CBC.

A major insider stated that CBC the refineries should come back online “within the next few months. Producers are turning to rail to ship their product to the U.S., which is a much more expensive route. Shipping oil by rail from Canada to the U.S. hit an all-time high of 204,000 barrels in June, according to Scotiabank. By the end of the year, rail shipments could reach 300,000 barrels “Given the multitude of challenges currently faced by Canadian energy pipeline projects, many in the industry increasingly see oil by rail less as a temporary Band-Aid and more as a permanent, flexible component of the supply chain to a Canadian energy sector seemingly unable to push a major pipeline project to the finish line

The International Energy Agency said in its last reports that Canadian Oil producers are entering into long-term contracts with the rail companies to ship oil.  Many oil Company’ executives feel this is not the most desirable route.  And from the perspective of the rail industry adding extra capacity to handle oil is risky since the oil producers only want to use the rail industry for a year or two.

The setbacks for the pipeline projects such as the failure of the Trans Mountain expansion might have changed minds on both sides.  . “Rail companies are tiring in customers with longer contracts, as the decision by a Canadian court to overturn the approval of the Trans Mountain pipeline project is firming up demand,” The IEA said in its October Oil Market Report. “Cenovus Energy, for instance, announced a three-year deal with Canada's CP Rail and CN Rail to transport 100 kb/d of crude from its oil sands facilities in Northern Alberta to the US Gulf Coast.”

Cenovus says that shipping oil to the U.S. Gulf Coast costs around US$20 per barrel.
Ecocrops International estimates that WCS will average a $24-per-barrel discount to WTI throughout 2019. Once Enbridge’s Line 3 replacement comes online in 2020 that could add several hundred thousand barrels per day of takeaway capacity, which could narrow the WCS discount to $21 per barrel.

Still, that leaves an uncomfortably long time for oil producers, who will have to struggle with painfully large discounts for WCS over the next year or so.

For more information on Ecocrops International  click here