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Impossible - they are selling oil at a 1/4 of its price

15 Oct 2018 10:28|Marcin Lipka

"For weeks now, the world has been facing oil prices between 70 and 85 USD per barrel. In Canada, however, some types of oil are sold at 20 USD. How is it possible?" writes Marcin Lipka, Conotoxia Senior Analyst.

The "curse" of abundance. This statement should not be prominent in relation to oil producers at this time. The world's chief analysts are debating whether the price of a barrel will break the barrier of 100 USD, as well as the dramatic reduction in production levels in Iran and Venezuela that this represents. Therefore, the remaining countries should now be enjoying record high prices and extremely high margins.

Meanwhile, Canadian producers are struggling with a completely different situation. Their Western Canadian Select (WCS) oil cannot be delivered to the refinery. The inefficient transport infrastructure for this raw material, combined with packed warehouses and high production, pushed WCS price down to 20 USD per barrel.

Heavy oil, big problem

In Alberta, a province extremely rich in energy resources, heavy oil (high density, unconventional source - tar sands) is mainly extracted. Before being prepared for transport to the refinery, it needs to be diluted, and processing usually costs more than light WTI crude oil. For these reasons, WCS usually costs 10-20 USD less than American or European oil.

However, currently, the key reason for this dramatic fall in the price of WCS is the fact that this oil cannot be transported to the refinery. Pipelines are congested and Canadian warehouses are full. Additionally, the rail network has limited capacity, preventing oil from being exported outside of Alberta.

Even if oil could be transported from Alberta, the majority of WCS customers (mainly refineries in the US Midwest) are either having temporary technical delays or are affected by malfunctions at the moment. The infrastructure has also not been adapted for export by sea, e.g. via the Pacific Ocean.

As a result, the price difference between WTI and WCS oil has sharply increased over the past few weeks. At the end of last week, it reached a record high of 50 USD per barrel (data from Bloomberg). The difference between European Brent and WCS is 60 USD per barrel.

Low prices but not for drivers

As is often the case, someone's loss is another’s gain. Record-high margins are currently enjoyed by those customers who have contracted the transport of oil and settled at current prices, and their refineries are happily working at full capacity. Car owners will not be pleased about the Canadian paradox, because prices on the fuel market are mainly derived from WTI or Brent crude oil and not from WCS.

15 Oct 2018 10:28|Marcin Lipka

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