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Crude Market Vulnerable Due to Limited Export Sites


 MNP's TAKE: The combined effect of a limited number of customers for western Canadian oil and record high oil inventory levels in Cushing, Oklahoma means  producers are essentially price takers rather than setters. Having little control over their revenues, producers have no choice but to reduce production costs as much as possible to minimize their losses. Service companies will also have to keep tight control of their costs as their revenues continue to be pressured by their producer customers.

To learn more, contact David Hammermeister, CPA, CA, at 306.637.2310 or [email protected], or your local MNP Oilfield Services Advisor.


Heavy concentration of Canadian oil exports to just a handful of U.S. refineries is the biggest risk facing the country’s crude oil market each day, especially as depressed world prices drag on, Royal Bank of Canada says.

Half the 3.2 million barrels that Canadian producers ship across the border each day go to just eight refineries, most located in the U.S. Midwest. When one or more of the refineries are shut for maintenance or suffer unplanned outages, the discount that’s slapped on the supply deepens, sometimes to extremes.

Without more options for shipments, it squelches returns for producers as gluts build up in Western Canada, said Michael Tran, strategist with RBC Capital Markets. “It is a one-buyer problem, but if you strip away the layers and trace each Canadian exported barrel to each U.S. refiner, it paints a more dire picture,” Mr. Tran said.

The Whiting, Ind., refinery run by BP PLC, for instance, buys 10 per cent of Canada’s exported crude and an August outage in a crude processing unit at the plant deepened the discount on Western Canadian Select (WCS) heavy oil blend versus benchmark West Texas Intermediate (WTI) oil to more than $20 (U.S.) a barrel.

That put the price of WCS at just above $20, well under break-even costs of production.

On November 16, WCS for November delivery sold for $15.25 less then WTI, according to oil broker Net Energy Inc., translating into $31 a barrel for Canada’s heavy oil.

The energy sector has faced years of delays in approvals for contentious multibillion-dollar pipelines such as Keystone XL and Northern Gateway, which would allow companies to access new markets in the southern United States and in Asia.

In theory, that would lift prices for Canadian oil. Industry executives lament being so dependent on traditional U.S. markets, but access to more refineries in the country with the most refining capacity would reduce risks of sudden drops in demand from a few plants, Mr. Tran said.

In total, there are nearly 140 refineries in the United States with an overall capacity of 18 million barrels a day. Meanwhile, Canada has scant pipeline access to the West Coast, and it will be a few years before TransCanada Corp. can move crude on its proposed $12billion Energy East line to the Atlantic Coast, assuming it wins approvals.

The recent sharp increase in rail transport has allowed boosted access to a wider array of plants, but more pipeline capacity is still needed, he said.

“I think there will be fewer longterm contracts being signed and [oil by rail] will become more of a just-in-time business. If and when the price spread blows out, you can toss barrels onto the rails and you can still move them,” he said.

Mr. Tran expects the discount, known as the differential, for WCS to average at $12 to $14 under WTI. In 2013, before the oil-by-rail expansion, Canadian heavy crude at times sold for more than $40 a barrel under the benchmark, though U.S. oil was fetching more than $90 at the time.

The differential pricing system and lack of pure financial players in the market also weighs on prices, said Tim Pickering, head of Auspice Capital Advisors. Auspice runs the Canadian Crude Oil Index exchange-traded fund listed on the Toronto Stock Exchange. It began trading in May.

“If you look at any market in the world, you can just have the underlying wholesale participants – in this case the crude companies, the refineries and the like – participating in the physical trading,” Mr. Pickering said. “For any market to expand to its true potential, you need outside motivations, whether it’s speculators, traders, hedge funds, sovereign wealth funds, people with different drivers.”

Canadian heavy crude is traded on markets run by CME Group and Intercontinental Exchange in the United States, but prices are expressed as a differential to WTI as opposed to an absolute value for the commodity, which means an extra layer of complexity, he said.


This article was written by Jeffrey Jones from The Globe And Mail and was legally licensed through the NewsCred publisher network.